ID Logistics Group (EPA: IDL) has a fairly healthy balance sheet
Some say volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett said “volatility is far from risk.” So it can be obvious that you need to take debt into account, when thinking about the risk of any given stock, because too much debt can sink a business. We notice that Group Logistics ID SA (EPA: IDL) has a debt on its balance sheet. 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. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both cash and debt levels.
What is the debt of ID Logistics Group?
You can click on the graph below for historical figures, but it shows that as of December 2020, ID Logistics Group had 207.0 million euros in debt, an increase from 181.7 million euros , over one year. However, because it has a cash reserve of € 160.1 million, its net debt is lower, at around € 46.8 million.
Is the balance sheet of ID Logistics Group healthy?
Zooming in on the latest balance sheet data, we can see that ID Logistics Group had a liability of € 594.4m due within 12 months and a liability of € 437.1m due beyond. On the other hand, it had cash of € 160.1 million and € 334.1 million in receivables within one year. It therefore has total liabilities of € 537.3 million more than its combined cash and short-term receivables.
While that may sound like a lot, it’s not so bad since ID Logistics Group has a market capitalization of 1.35 billion euros, and could therefore probably strengthen its balance sheet by raising capital if necessary. However, it is always worth taking a close look at your ability to repay debts.
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.
While ID Logistics Group’s low debt-to-EBITDA ratio of 0.47 suggests modest use of debt, the fact that EBIT only covered interest expense 5.0 times last year gives us pause for thought. . We therefore recommend that you keep a close eye on the impact of financing costs on the business. If ID Logistics Group can continue to increase its EBIT at the rate of 12% last year compared to last year, then it will find its debt more manageable. There is no doubt that we learn the most about debt from the balance sheet. But in the end, it is the company’s future profitability that will decide whether ID Logistics Group can strengthen its balance sheet over time. So if you want to see what the professionals are thinking, you might find this free report on analysts’ earnings forecasts Be interesting.
But our last consideration is also important, because a company cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Fortunately for all shareholders, ID Logistics Group has actually generated more free cash flow than EBIT over the past three years. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
Fortunately, ID Logistics Group’s impressive conversion of EBIT to free cash flow means it has the upper hand over its debt. And this is only the beginning of the good news since its net debt to EBITDA is also very encouraging. When we consider the range of factors above, it looks like ID Logistics Group is pretty reasonable with its use of debt. While this carries some risk, it can also improve returns for shareholders. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that ID Logistics Group shows 1 warning sign in our investment analysis , you must know…
If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of cash net growth stocks without delay.
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