Is CTT - Correios De Portugal (ELI:CTT) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, CTT - Correios De Portugal, S.A. (ELI:CTT) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 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 CTT - Correios De Portugal

What Is CTT - Correios De Portugal's Debt?

You can click the graphic below for the historical numbers, but it shows that CTT - Correios De Portugal had €362.1m of debt in September 2024, down from €489.5m, one year before. However, its balance sheet shows it holds €2.58b in cash, so it actually has €2.22b net cash.

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

The latest balance sheet data shows that CTT - Correios De Portugal had liabilities of €4.63b due within a year, and liabilities of €626.2m falling due after that. Offsetting this, it had €2.58b in cash and €367.5m in receivables that were due within 12 months. So its liabilities total €2.31b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €866.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, CTT - Correios De Portugal would probably need a major re-capitalization if its creditors were to demand repayment. Given that CTT - Correios De Portugal has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

It is well worth noting that CTT - Correios De Portugal's EBIT shot up like bamboo after rain, gaining 49% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While CTT - Correios De Portugal does have more liabilities than liquid assets, it also has net cash of €2.22b. The cherry on top was that in converted 673% of that EBIT to free cash flow, bringing in €1.4b. So we don't have any problem with CTT - Correios De Portugal's use of debt. 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 CTT - Correios De Portugal's earnings per share history for free.

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.

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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.