Does Hellenic Telecommunications Organization (ATH:HTO) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Hellenic Telecommunications Organization S.A. (ATH:HTO) does have debt on its balance sheet. 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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hellenic Telecommunications Organization

What Is Hellenic Telecommunications Organization's Debt?

You can click the graphic below for the historical numbers, but it shows that Hellenic Telecommunications Organization had €888.3m of debt in September 2024, down from €962.1m, one year before. However, it does have €469.3m in cash offsetting this, leading to net debt of about €419.0m.

How Strong Is Hellenic Telecommunications Organization's Balance Sheet?

According to the last reported balance sheet, Hellenic Telecommunications Organization had liabilities of €1.72b due within 12 months, and liabilities of €1.36b due beyond 12 months. Offsetting these obligations, it had cash of €469.3m as well as receivables valued at €658.6m due within 12 months. So it has liabilities totalling €1.96b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Hellenic Telecommunications Organization is worth €6.08b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Hellenic Telecommunications Organization has a low net debt to EBITDA ratio of only 0.37. And its EBIT easily covers its interest expense, being 54.5 times the size. So we're pretty relaxed about its super-conservative use of debt. Also positive, Hellenic Telecommunications Organization grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hellenic Telecommunications Organization 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Hellenic Telecommunications Organization generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

Hellenic Telecommunications Organization's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Looking at the bigger picture, we think Hellenic Telecommunications Organization's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. Given Hellenic Telecommunications Organization has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.