These 4 Measures Indicate That Etn. Fr. Colruyt (EBR:COLR) Is Using Debt Reasonably Well

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. Importantly, Etn. Fr. Colruyt NV (EBR:COLR) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Etn. Fr. Colruyt

What Is Etn. Fr. Colruyt's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Etn. Fr. Colruyt had debt of €146.0m, up from €19.3m in one year. But it also has €278.0m in cash to offset that, meaning it has €132.0m net cash.

How Healthy Is Etn. Fr. Colruyt's Balance Sheet?

The latest balance sheet data shows that Etn. Fr. Colruyt had liabilities of €2.18b due within a year, and liabilities of €507.5m falling due after that. On the other hand, it had cash of €278.0m and €669.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.74b.

Etn. Fr. Colruyt has a market capitalization of €6.60b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Etn. Fr. Colruyt also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Etn. Fr. Colruyt grew its EBIT by 9.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Etn. Fr. Colruyt's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Etn. Fr. Colruyt may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Etn. Fr. Colruyt recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While Etn. Fr. Colruyt does have more liabilities than liquid assets, it also has net cash of €132.0m. On top of that, it increased its EBIT by 9.6% in the last twelve months. So we are not troubled with Etn. Fr. Colruyt's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Etn. Fr. Colruyt 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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