Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Rémy Cointreau SA (EPA: RCO) uses debt. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Rémy Cointreau
What is Rémy Cointreau’s net debt?
The image below, which you can click for more details, shows that Rémy Cointreau had a debt of € 495.7 million at the end of March 2021, against € 696.5 million over one year. However, because it has a cash reserve of € 201.0 million, its net debt is lower, at around € 294.7 million.
Is Rémy Cointreau’s balance sheet healthy?
Zooming in on the latest balance sheet data, we see that Rémy Cointreau had a liability of € 719.8 million maturing 12 months and a liability of € 512.1 million maturing thereafter. In return, he had € 201.0 million in cash and € 120.4 million in receivables due within 12 months. Its liabilities thus exceed the sum of its cash and its receivables (short term) by € 910.5 million.
With the listed Rémy Cointreau share amounting to a very impressive total of 8.43 billion euros, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
Rémy Cointreau has a low net debt to EBITDA ratio of only 1.1. And its EBIT covers its interest costs a whopping 19.3 times. So we’re pretty relaxed about its ultra-conservative use of debt. Another positive point, Rémy Cointreau increased its EBIT by 10% compared to last year, further increasing its capacity to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Rémy Cointreau will be able to strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Rémy Cointreau’s free cash flow has amounted to 21% of its EBIT, less than we expected. This low cash conversion makes debt management more difficult.
Our point of view
Remy Cointreau’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But, on a darker note, we’re a little concerned about its conversion from EBIT to free cash flow. Considering all of the aforementioned factors, it appears to us that Rémy Cointreau can manage its debt quite comfortably. Of course, while this leverage can improve returns on equity, it comes with more risk, so it’s worth keeping an eye out for. Over time, stock prices tend to follow earnings per share, so if you are interested in Rémy Cointreau, you can click here to view an interactive graph of its historical earnings per share.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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