We Think bpost/SA (EBR:BPOST) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that bpost NV/SA (EBR:BPOST) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for bpost/SA

What Is bpost/SA's Net Debt?

As you can see below, bpost/SA had €817.2m of debt at December 2021, down from €977.8m a year prior. But on the other hand it also has €907.5m in cash, leading to a €90.3m net cash position.

How Strong Is bpost/SA's Balance Sheet?

We can see from the most recent balance sheet that bpost/SA had liabilities of €1.64b falling due within a year, and liabilities of €1.61b due beyond that. Offsetting this, it had €907.5m in cash and €888.4m in receivables that were due within 12 months. So it has liabilities totalling €1.46b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of €1.17b, we think shareholders really should watch bpost/SA's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that bpost/SA 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 top of that, bpost/SA grew its EBIT by 30% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if bpost/SA can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While bpost/SA 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. Happily for any shareholders, bpost/SA actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While bpost/SA does have more liabilities than liquid assets, it also has net cash of €90.3m. And it impressed us with free cash flow of €226m, being 113% of its EBIT. So we don't have any problem with bpost/SA's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that bpost/SA is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.