Hellenic Telecommunications Organization (ATH:HTO) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Hellenic Telecommunications Organization S.A. (ATH:HTO) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hellenic Telecommunications Organization

What Is Hellenic Telecommunications Organization's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hellenic Telecommunications Organization had €973.5m of debt in June 2023, down from €1.29b, one year before. On the flip side, it has €826.6m in cash leading to net debt of about €146.9m.

A Look At Hellenic Telecommunications Organization's Liabilities

We can see from the most recent balance sheet that Hellenic Telecommunications Organization had liabilities of €2.18b falling due within a year, and liabilities of €1.30b due beyond that. Offsetting these obligations, it had cash of €826.6m as well as receivables valued at €569.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.08b.

Hellenic Telecommunications Organization has a market capitalization of €5.73b, 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.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Hellenic Telecommunications Organization has a low net debt to EBITDA ratio of only 0.12. And its EBIT easily covers its interest expense, being 23.2 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, Hellenic Telecommunications Organization saw its EBIT drop by 2.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. 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 clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Hellenic Telecommunications Organization recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

Happily, Hellenic Telecommunications Organization's impressive interest cover implies it has the upper hand on its debt. But, on a more sombre note, we are a little concerned by its EBIT growth rate. When we consider the range of factors above, it looks like Hellenic Telecommunications Organization is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Hellenic Telecommunications Organization 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.