We Think Corticeira Amorim S.G.P.S (ELI:COR) Can Stay On Top Of Its Debt

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. We note that Corticeira Amorim, S.G.P.S., S.A. (ELI:COR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 Debt?

The image below, which you can click on for greater detail, shows that Corticeira Amorim S.G.P.S had debt of €150.6m at the end of June 2021, a reduction from €188.6m over a year. However, because it has a cash reserve of €103.7m, its net debt is less, at about €47.0m.

A Look At Corticeira Amorim S.G.P.S' Liabilities

Zooming in on the latest balance sheet data, we can see that Corticeira Amorim S.G.P.S had liabilities of €314.9m due within 12 months and liabilities of €164.4m due beyond that. On the other hand, it had cash of €103.7m and €267.8m worth of receivables due within a year. So its liabilities total €107.8m more than the combination of its cash and short-term receivables.

Given Corticeira Amorim S.G.P.S has a market capitalization of €1.56b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

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.

Corticeira Amorim S.G.P.S's net debt is only 0.36 times its EBITDA. And its EBIT covers its interest expense a whopping 67.9 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Fortunately, Corticeira Amorim S.G.P.S grew its EBIT by 7.5% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Corticeira Amorim S.G.P.S 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, Corticeira Amorim S.G.P.S recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

The good news is that Corticeira Amorim S.G.P.S's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. Zooming out, Corticeira Amorim S.G.P.S seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. 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.

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.

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.

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