We Think Hellenic Telecommunications Organization (ATH:HTO) Can Stay On Top Of Its Debt

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.' 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, Hellenic Telecommunications Organization S.A. (ATH:HTO) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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?

As you can see below, Hellenic Telecommunications Organization had €1.19b of debt at March 2021, down from €1.65b a year prior. However, it also had €608.4m in cash, and so its net debt is €578.4m.

How Strong Is Hellenic Telecommunications Organization's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hellenic Telecommunications Organization had liabilities of €2.04b due within 12 months and liabilities of €1.63b due beyond that. On the other hand, it had cash of €608.4m and €476.0m worth of receivables due within a year. So it has liabilities totalling €2.58b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Hellenic Telecommunications Organization has a market capitalization of €6.82b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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's net debt is only 0.47 times its EBITDA. And its EBIT easily covers its interest expense, being 13.2 times the size. So we're pretty relaxed about its super-conservative use of debt. While Hellenic Telecommunications Organization doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hellenic Telecommunications Organization's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Hellenic Telecommunications Organization recorded free cash flow worth a fulsome 93% 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

The good news is that Hellenic Telecommunications Organization's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Taking all this data into account, it seems to us that Hellenic Telecommunications Organization takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Hellenic Telecommunications Organization , and understanding them should be part of your investment process.

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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