Tipiak Société Anonyme (EPA: TIPI) seems to be using a lot of debt

Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. 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. We can see that Tipiak Limited Company (EPA: TIPI) uses debt in its operations. 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 cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. The first step in examining a business’s debt levels is to consider its cash flow and debt together.

Discover our latest analysis for Tipiak Société Anonyme

What is the net debt of Tipiak Société Anonyme?

The image below, which you can click for more details, shows that in June 2021 Tipiak Société Anonyme had a debt of € 63.1m, compared to € 57.1m in one year. However, because it has a cash reserve of € 9.62 million, its net debt is lower, at around € 53.4 million.

ENXTPA: TIPI History of debt to equity December 5, 2021

How healthy is Tipiak Société Anonyme’s balance sheet?

The latest balance sheet data show that Tipiak Société Anonyme had debts of € 54.9 million maturing within the year, and debts of € 65.0 million maturing thereafter. On the other hand, it had cash of € 9.62 million and € 33.3 million in receivables within one year. It therefore has total liabilities of € 77.0 million more than its combined cash and short-term receivables.

When you consider that this shortfall exceeds the company’s $ 53.9 million market capitalization, you might be inclined to carefully review the balance sheet. In theory, extremely large dilution would be required if the company were forced to repay debts by raising capital at the current share price.

We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

With a net debt on EBITDA of 3.5 Tipiak Société Anonyme has a fairly significant debt. On the positive side, its EBIT was 9.4 times its interest expense and its net debt to EBITDA was quite high, at 3.5. Unfortunately, Tipiak Société Anonyme’s EBIT fell 4.7% last year. If this earnings trend continues, its debt load will rise like the heart of a polar bear watching its only cub. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Tipiak Société Anonyme’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 pay off its debts with hard cash, not with book profits. We must therefore clearly examine whether this EBIT leads to the corresponding free cash flow. Over the past three years, Tipiak Société Anonyme has recorded a significant negative free cash flow in total. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.

Our point of view

At first glance, Tipiak Société Anonyme’s level of total liabilities left us hesitant about the stock, and its conversion from EBIT to free cash flow was no more appealing than the single empty restaurant on the busiest night of. the year. But on the bright side, his interest coverage is a good sign and makes us more optimistic. It is clear that we consider Tipiak Société Anonyme to be quite risky, given the health of its balance sheet. We are therefore almost as wary of this stock as a hungry kitten falls into its owner’s fish pond: once bitten, twice shy, as they say. 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. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Tipiak Société Anonyme (1 of which makes us a little uncomfortable!) to know.

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

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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.

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