Does Corticeira Amorim S.G.P.S (ELI:COR) Have A Healthy Balance Sheet?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Corticeira Amorim, S.G.P.S., S.A. (ELI:COR) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Corticeira Amorim S.G.P.S

How Much Debt Does Corticeira Amorim S.G.P.S Carry?

You can click the graphic below for the historical numbers, but it shows that Corticeira Amorim S.G.P.S had €104.6m of debt in December 2020, down from €177.0m, one year before. On the flip side, it has €43.6m in cash leading to net debt of about €61.0m.

How Healthy Is Corticeira Amorim S.G.P.S' Balance Sheet?

The latest balance sheet data shows that Corticeira Amorim S.G.P.S had liabilities of €32.2m due within a year, and liabilities of €146.3m falling due after that. Offsetting these obligations, it had cash of €43.6m as well as receivables valued at €214.6m due within 12 months. So it can boast €79.7m more liquid assets than total liabilities.

This surplus suggests that Corticeira Amorim S.G.P.S has a conservative balance sheet, and could probably eliminate its debt without much difficulty.

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).

Corticeira Amorim S.G.P.S has a low net debt to EBITDA ratio of only 0.50. And its EBIT easily covers its interest expense, being 40.7 times the size. So we're pretty relaxed about its super-conservative use of debt. But the other side of the story is that Corticeira Amorim S.G.P.S saw its EBIT decline by 4.7% over the last year. 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 it is future earnings, more than anything, that will determine Corticeira Amorim S.G.P.S'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 company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, Corticeira Amorim S.G.P.S's free cash flow amounted to 42% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, Corticeira Amorim S.G.P.S'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. Looking at all the aforementioned factors together, it strikes us that Corticeira Amorim S.G.P.S can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Corticeira Amorim S.G.P.S's earnings per share history for free.

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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