Here’s why Nexity (EPA: NXI) can responsibly manage its debt
Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Nexity SA (EPA: NXI) uses debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. 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. 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 think of a business’s use of debt, we first look at cash flow and debt together.
Discover our latest analysis for Nexity
What is Nexity’s debt?
As you can see below, Nexity had € 1.73 billion in debt in June 2021, up from € 2.30 billion the year before. On the other hand, it has 870.7 million euros in cash, leading to a net debt of approximately 862.0 million euros.
How strong is Nexity’s balance sheet?
According to the last published balance sheet, Nexity had liabilities of € 4.18bn at less than 12 months and liabilities of € 1.55bn over 12 months. In return, he had € 870.7 million in cash and € 1.76 billion in receivables due within 12 months. Its liabilities thus exceed the sum of its cash and its receivables (short term) by 3.11 billion euros.
When you consider that this deficit exceeds the company’s $ 2.21 billion market capitalization, you may well be inclined to carefully review the balance sheet. In the event that the company were to clean up its balance sheet quickly, it seems likely that shareholders would suffer significant dilution.
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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Nexity’s net debt stands at a very reasonable level of 2.1 times its EBITDA, while its EBIT only covered its interest expense 4.4 times last year. While we’re not worried about these numbers, it’s worth noting that the cost of the company’s debt does have a real impact. Note that Nexity’s EBIT jumped like bamboo after the rain, gaining 49% over the last twelve months. This will make it easier to manage your debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Nexity’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
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, Nexity has indeed generated more free cash flow than EBIT. This kind of cash conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
Both Nexity’s ability to convert its EBIT into free cash flow and its EBIT growth rate have reinforced our ability to manage its debt. In contrast, our confidence was undermined by his apparent struggle to manage his total liabilities. When you consider all of the factors mentioned above, we feel a little cautious about Nexity’s use of debt. While we understand that debt can improve returns on equity, we suggest shareholders watch their debt levels closely, lest they increase. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Nexity has 4 warning signs (and 1 which is potentially serious) we think you should be aware of.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.