Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is 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 Millicom International Cellular SA (NASDAQ: TIGO) uses debt. But the most important question is: what risk does this debt create?
When is debt a problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
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What is the debt of Millicom International Cellular?
As you can see below, Millicom International Cellular had debt of US $ 5.65 billion in March 2021, up from US $ 6.83 billion the year before. However, it has US $ 780.0 million in cash offsetting this, leading to net debt of around US $ 4.87 billion.
How healthy is Millicom International Cellular’s balance sheet?
The latest balance sheet data shows Millicom International Cellular had $ 2.41 billion in debt due within one year, and $ 7.14 billion in debt due thereafter. In return, he had $ 780.0 million in cash and $ 537.0 million in receivables due within 12 months. It therefore has liabilities totaling US $ 8.23 billion more than its cash and short-term receivables combined.
This deficit casts a shadow over the $ 4.02 billion company as a colossus towering over mere mortals. We therefore believe that shareholders should watch it closely. Ultimately, Millicom International Cellular would likely need a major recapitalization if its creditors demanded repayment.
We measure a company’s debt load relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
While we’re not worried about Millicom International Cellular’s net debt to EBITDA ratio of 3.8, we do think its ultra-low 0.39 times interest coverage is a sign of high leverage. This is in large part due to the company’s large depreciation and amortization charges, which arguably means that its EBITDA is a very generous measure of profit, and its debt may be heavier than it appears. At first glance. It seems clear that the cost of borrowing money is having a negative impact on shareholder returns lately. Worse yet, Millicom International Cellular has seen its EBIT reach 52% over the past 12 months. If profits continue to follow this path, it will be more difficult to pay off this debt than to convince us to run a marathon in the rain. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Millicom International Cellular’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business can only repay its debts with hard cash, not with book profits. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Looking back over the past three years, Millicom International Cellular has actually experienced a cash outflow overall. Debt is much riskier for companies with unreliable free cash flow, so shareholders should hope that past spending will produce free cash flow in the future.
Our point of view
To be frank, Millicom International Cellular’s EBIT growth rate and its history of staying above its total liabilities make us rather uncomfortable with its debt levels. In addition, its conversion of EBIT to free cash flow also fails to inspire confidence. Considering everything we have mentioned above, it is fair to say that Millicom International Cellular is heavily in debt. If you play with fire you might get burned, so we would probably give this stock a lot of space. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Millicom International Cellular you should know.
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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