Österreichische Post (VIE:POST) Takes On Some Risk With Its Use Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Österreichische Post AG (VIE:POST) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Österreichische Post

How Much Debt Does Österreichische Post Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Österreichische Post had €106.3m of debt, an increase on €3.40m, over one year. However, it does have €108.8m in cash offsetting this, leading to net cash of €2.50m.

How Healthy Is Österreichische Post's Balance Sheet?

We can see from the most recent balance sheet that Österreichische Post had liabilities of €3.48b falling due within a year, and liabilities of €715.4m due beyond that. Offsetting these obligations, it had cash of €108.8m as well as receivables valued at €440.3m due within 12 months. So it has liabilities totalling €3.64b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €1.90b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Österreichische Post would likely require a major re-capitalisation if it had to pay its creditors today. Given that Österreichische Post has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

On the other hand, Österreichische Post saw its EBIT drop by 6.5% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Österreichische Post's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Österreichische Post has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Österreichische Post actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Österreichische Post's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €2.50m. And it impressed us with free cash flow of €169m, being 186% of its EBIT. So although we see some areas for improvement, we're not too worried about Österreichische Post's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Österreichische Post that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.