EVRAZ (LON: EVR) has a fairly healthy track record


Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. 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 EVRAZ SA (LON: EVR) uses debt. But the most important question is: what risk does this debt create?

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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. 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. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest review for EVRAZ

What is EVRAZ’s net debt?

You can click on the graph below for historical figures, but it shows that EVRAZ had debt of US $ 4.54 billion in June 2021, up from US $ 4.95 billion a year earlier. However, he also had $ 1.43 billion in cash, so his net debt is $ 3.11 billion.

LSE: EVR History of debt to equity December 16, 2021

Is EVRAZ’s track record healthy?

We can see from the most recent balance sheet that EVRAZ had liabilities of US $ 2.64 billion due within one year and liabilities of US $ 4.90 billion due within one year. -of the. On the other hand, he had $ 1.43 billion in cash and $ 770.0 million in receivables due within a year. It therefore has liabilities totaling US $ 5.34 billion more than its cash and short-term receivables combined.

This deficit is not that big as EVRAZ is worth US $ 11.5 billion and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay your debt.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). 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).

EVRAZ has a low net debt to EBITDA ratio of just 0.99. And its EBIT easily covers its interest costs, being 10.3 times higher. So we’re pretty relaxed about its ultra-conservative use of debt. On top of that, we are happy to report that EVRAZ has increased its EBIT by 81%, reducing the specter of future debt repayments. 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 EVRAZ’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

Finally, a business can only pay off its debts with hard cash, not with book profits. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, EVRAZ has recorded free cash flow of 79% of its EBIT, which is close to normal, as free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.

Our point of view

Fortunately, EVRAZ’s impressive EBIT growth rate means it has the upper hand over its debt. But, on a darker note, we’re a little concerned with its total liability level. Zooming out, EVRAZ seems to be using the debt in a very reasonable way; and that gets the nod from us. While debt comes with risk, when used wisely, it can also generate a better return on equity. 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 EVRAZ (1 of which makes us a little uncomfortable!) to know.

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.

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 documents. Simply Wall St has no position in any of the stocks mentioned.


Comments are closed.