CTT - Correios De Portugal (ELI:CTT) Has A Somewhat Strained Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 CTT - Correios De Portugal, S.A. (ELI:CTT) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for CTT - Correios De Portugal

How Much Debt Does CTT - Correios De Portugal Carry?

The image below, which you can click on for greater detail, shows that CTT - Correios De Portugal had debt of €142.3m at the end of September 2020, a reduction from €175.1m over a year. However, it does have €472.5m in cash offsetting this, leading to net cash of €330.2m.

How Strong Is CTT - Correios De Portugal's Balance Sheet?

According to the last reported balance sheet, CTT - Correios De Portugal had liabilities of €2.09b due within 12 months, and liabilities of €488.6m due beyond 12 months. Offsetting this, it had €472.5m in cash and €264.8m in receivables that were due within 12 months. So its liabilities total €1.85b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €351.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, CTT - Correios De Portugal would probably need a major re-capitalization if its creditors were to demand repayment. CTT - Correios De Portugal boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

It is just as well that CTT - Correios De Portugal's load is not too heavy, because its EBIT was down 25% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if CTT - Correios De Portugal can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While CTT - Correios De Portugal has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, CTT - Correios De Portugal actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While CTT - Correios De Portugal does have more liabilities than liquid assets, it also has net cash of €330.2m. The cherry on top was that in converted 283% of that EBIT to free cash flow, bringing in €211m. Despite the cash, we do find CTT - Correios De Portugal's level of total liabilities concerning, so we're not particularly comfortable with the stock. 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 example, we've discovered 3 warning signs for CTT - Correios De Portugal that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

If you’re looking to trade CTT - Correios De Portugal, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.