Is Corticeira Amorim S.G.P.S (ELI:COR) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Corticeira Amorim, S.G.P.S., S.A. (ELI:COR) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Corticeira Amorim S.G.P.S

What Is Corticeira Amorim S.G.P.S's Net Debt?

The image below, which you can click on for greater detail, shows that Corticeira Amorim S.G.P.S had debt of €141.5m at the end of March 2022, a reduction from €163.9m over a year. However, it does have €95.6m in cash offsetting this, leading to net debt of about €45.9m.

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 €330.6m due within a year, and liabilities of €178.8m falling due after that. Offsetting this, it had €95.6m in cash and €231.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €182.2m.

Of course, Corticeira Amorim S.G.P.S has a market capitalization of €1.35b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Corticeira Amorim S.G.P.S has a low net debt to EBITDA ratio of only 0.32. And its EBIT easily covers its interest expense, being 66.0 times the size. So we're pretty relaxed about its super-conservative use of debt. In addition to that, we're happy to report that Corticeira Amorim S.G.P.S has boosted its EBIT by 30%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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 it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Corticeira Amorim S.G.P.S generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

Happily, Corticeira Amorim S.G.P.S's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. It looks Corticeira Amorim S.G.P.S has no trouble standing on its own two feet, and it has no reason to fear its lenders. To our minds it has a healthy happy balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Corticeira Amorim S.G.P.S that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.