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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that JCDecaux SA (EPA:DEC) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for JCDecaux
What Is JCDecaux's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 JCDecaux had €2.75b of debt, an increase on €1.36b, over one year. However, it does have €1.66b in cash offsetting this, leading to net debt of about €1.10b.
How Strong Is JCDecaux's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that JCDecaux had liabilities of €2.63b due within 12 months and liabilities of €5.82b due beyond that. Offsetting this, it had €1.66b in cash and €657.2m in receivables that were due within 12 months. So it has liabilities totalling €6.14b more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of €4.55b, we think shareholders really should watch JCDecaux'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. 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 JCDecaux can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, JCDecaux made a loss at the EBIT level, and saw its revenue drop to €2.1b, which is a fall of 40%. To be frank that doesn't bode well.
Caveat Emptor
Not only did JCDecaux's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €182m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of €605m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. To that end, you should be aware of the 2 warning signs we've spotted with JCDecaux .
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. 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.
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About ENXTPA:DEC
Solid track record with limited growth.
