We believe AVEVA Group (LON: AVV) can get its debt under control

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David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies AVEVA Group plc (LON:AVV) uses debt. But should shareholders worry about its use of debt?

What risk does debt carry?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.

Discover our latest analysis for AVEVA Group

How much debt does the AVEVA group have?

As you can see below, at the end of March 2022, the AVEVA Group had debt of £684.5m, up from £654.0m a year ago. Click on the image for more details. However, he has £279.3m in cash to offset this, resulting in a net debt of around £405.2m.

LSE: AVV Debt to equity July 2, 2022

How strong is the AVEVA group’s balance sheet?

Zooming in on the latest balance sheet data, we can see that the AVEVA Group had liabilities of £608.1m due within 12 months and liabilities of £853.2m due beyond. In return, he had £279.3 million in cash and £639.1 million in debt due within 12 months. It therefore has liabilities totaling £542.9m more than its cash and short-term receivables, combined.

Given that the AVEVA Group has a market capitalization of £6.82 billion, it’s hard to believe that these liabilities pose a big threat. That said, it is clear that we must continue to monitor its record, lest it deteriorate.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

The AVEVA Group has a debt/EBITDA ratio of 3.1 and its EBIT covered its interest charges 5.3 times. This suggests that while debt levels are significant, we will refrain from labeling them problematic. Importantly, the AVEVA Group’s EBIT has fallen by 53% over the last twelve months. If this decline continues, it will be more difficult to repay debts than to sell foie gras at a vegan convention. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether the AVEVA Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the taxman may love accounting profits, lenders only accept cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, the AVEVA Group has recorded free cash flow representing 96% of its EBIT, which is higher than what we would normally expect. This positions him well to pay off debt if desired.

Our point of view

The AVEVA Group’s EBIT growth rate was a real negative in this analysis, even though the other factors we considered were considerably better. In particular, we are blown away by its conversion of EBIT to free cash flow. Considering all the factors mentioned above, we feel a bit cautious about the AVEVA Group’s use of debt. While debt has its upside in higher potential returns, we think shareholders should certainly consider how debt levels might make the stock more risky. Of course, we wouldn’t say no to the extra confidence we’d gain if we knew insiders of the AVEVA Group bought shares: if you’re on the same page, you can find out if insiders are buying by clicking this link. link.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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