These 4 Measures Indicate That ANY Biztonsági Nyomda Nyrt (BUSE:ANY) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies ANY Biztonsági Nyomda Nyrt. (BUSE:ANY) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ANY Biztonsági Nyomda Nyrt

What Is ANY Biztonsági Nyomda Nyrt's Debt?

As you can see below, ANY Biztonsági Nyomda Nyrt had Ft7.16b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has Ft2.31b in cash leading to net debt of about Ft4.85b.

How Strong Is ANY Biztonsági Nyomda Nyrt's Balance Sheet?

The latest balance sheet data shows that ANY Biztonsági Nyomda Nyrt had liabilities of Ft7.96b due within a year, and liabilities of Ft6.19b falling due after that. On the other hand, it had cash of Ft2.31b and Ft3.91b worth of receivables due within a year. So its liabilities total Ft7.92b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because ANY Biztonsági Nyomda Nyrt is worth Ft19.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

ANY Biztonsági Nyomda Nyrt's net debt to EBITDA ratio of about 2.1 suggests only moderate use of debt. And its commanding EBIT of 10.8 times its interest expense, implies the debt load is as light as a peacock feather. Shareholders should be aware that ANY Biztonsági Nyomda Nyrt's EBIT was down 30% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine ANY Biztonsági Nyomda Nyrt'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 the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, ANY Biztonsági Nyomda Nyrt recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

ANY Biztonsági Nyomda Nyrt's EBIT growth rate was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. In particular, its interest cover was re-invigorating. When we consider all the factors discussed, it seems to us that ANY Biztonsági Nyomda Nyrt is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. 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 ANY Biztonsági Nyomda Nyrt (at least 2 which make us uncomfortable) , 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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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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