Here’s why Finatis Société Anonyme (EPA:FNTS) is weighed down by its debt
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that Finatis Limited Company (EPA:FNTS) uses debt in its business. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. 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 when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Finatis Société Anonyme
What is the net indebtedness of Finatis Société Anonyme?
You can click on the graph below for historical figures, but it shows that in December 2021, Finatis Société Anonyme had €12.3 billion in debt, an increase from €11.6 billion, over a year. On the other hand, it has €2.42 billion in cash, resulting in a net debt of around €9.91 billion.
How healthy is Finatis Société Anonyme’s balance sheet?
The latest balance sheet data shows that Finatis Société Anonyme had liabilities of 11.9 billion euros due within one year and liabilities of 16.4 billion euros due in the future. On the other hand, it had 2.42 billion euros in cash and 2.24 billion euros in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €23.7 billion.
The deficiency here weighs heavily on the company itself of 130.9 million euros, like a child struggling under the weight of a huge backpack full of books, his sports equipment and a trumpet. So we definitely think shareholders need to watch this one closely. Ultimately, Finatis Société Anonyme would likely need a significant recapitalization if its creditors were to demand repayment.
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). Thus, we consider debt to earnings with and without amortization and depreciation expense.
The shareholders of Finatis Société Anonyme are faced with the double whammy of a high net debt to EBITDA ratio (6.0) and a rather low interest coverage, since the EBIT is only 1.3 times the interest charge. The debt burden here is considerable. Worse still, Finatis Société Anonyme has seen its EBIT fall to 21% over the last 12 months. If earnings continue to follow this trajectory, paying off this debt will be more difficult than convincing us to run a marathon in the rain. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Finatis Société Anonyme will need income to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
But our last consideration is also important, because a company cannot pay off its debts with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Finatis Société Anonyme has recorded free cash flow of 49% of its EBIT, which is lower than expected. It’s not great when it comes to paying off debt.
Our point of view
To be frank, Finatis Société Anonyme’s EBIT growth rate and track record of keeping total liabilities under control makes us rather uncomfortable with its level of leverage. That said, its ability to convert EBIT to free cash flow is not that much of a concern. After reviewing the data points discussed, we believe that Finatis Société Anonyme is too leveraged. While some investors like this kind of risky play, it’s definitely not our cup of tea. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, Finatis Société Anonyme has 2 warning signs (and 1 which is a little obnoxious) that we think you should know about.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient 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 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.