David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Above all, Carel Industries SpA (BIT: CRL) carries a debt. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.
Check out our latest analysis for Carel Industries
What is the net debt of Carel Industries?
The graph below, which you can click for more details, shows that Carel Industries had â¬ 159.4m in debt in September 2021; about the same as the year before. On the other hand, it has 90.9 million euros in cash, leading to a net debt of around 68.5 million euros.
How healthy is Carel Industries’ balance sheet?
The latest balance sheet data shows that Carel Industries had debts of â¬ 148.2 million due within one year, and debts of â¬ 184.2 million due thereafter. In compensation for these obligations, he had cash of â¬ 90.9 million as well as receivables valued at â¬ 79.1 million within 12 months. It therefore has total liabilities of â¬ 162.5 million more than its combined cash and short-term receivables.
Considering that the publicly traded shares of Carel Industries are worth a total of 2.45 billion euros, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we look at debt versus earnings with and without amortization expenses.
Carel Industries has a low net debt to EBITDA ratio of just 0.89. And its EBIT easily covers its interest charges, being 34.4 times higher. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, Carel Industries has increased its EBIT by 46% over the past twelve months, and this growth will make it easier to process its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Carel Industries’ ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Carel Industries has generated strong free cash flow equivalent to 63% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Fortunately, Carel Industries’ impressive interest coverage means that it has the upper hand over its debt. And the good news doesn’t end there, as its EBIT growth rate also supports this impression! Overall, we don’t think Carel Industries is taking bad risks, as its debt seems modest. We are therefore not worried about the use of a small leverage on the balance sheet. When analyzing debt levels, the balance sheet is the obvious place to start. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you need to know the 1 warning sign we spotted with Carel Industries.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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