Vivendi (EPA: VIV) has a fairly healthy balance sheet

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 “. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, Vivendi SE (EPA: VIV) carries the debt. 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. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. 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, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

Check out our latest review for Vivendi

What is Vivendi’s net debt?

You can click on the graph below for the historical figures, but it shows that Vivendi had 4.83 billion euros in debt in June 2021, down from 5.89 billion euros a year earlier. On the other hand, it has 1.82 billion euros in liquidity leading to a net debt of approximately 3.01 billion euros.

ENXTPA: VIV History of debt to equity December 3, 2021

How strong is Vivendi’s balance sheet?

According to the last published balance sheet, Vivendi had liabilities of 12.2 billion euros within 12 months and liabilities of 7.60 billion euros due beyond 12 months. In return, he had € 1.82 billion in cash and € 5.77 billion in receivables due within 12 months. It therefore has liabilities totaling 12.2 billion euros more than its combined cash and short-term receivables.

Given that this deficit is actually greater than the company’s massive market cap of € 11.8 billion, we think shareholders should really watch Vivendi’s debt levels, like a parent watching their child. riding a bike for the first time. 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). 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).

Vivendi has a low debt to EBITDA ratio of only 1.3. And remarkably, despite her net debt, she actually received more interest in the past twelve months than she had to pay. So there is no doubt that this company can go into debt and still be cool as a cucumber. Another positive point, Vivendi increased its EBIT by 17% over the past year, further increasing its capacity to manage its debt. 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 Vivendi can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. 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, Vivendi has generated strong free cash flow equivalent to 62% of its EBIT, roughly what we expected. This free cash flow puts the business in a good position to repay debt, if any.

Our point of view

Based on our analysis, Vivendi’s interest coverage should signal that it will not have too many problems with its debt. However, our other observations were not so encouraging. For example, his total liability level makes us a little nervous about his debt. When we consider all the elements mentioned above, it seems to us that Vivendi is managing its debt fairly well. But beware: we believe debt levels are high enough to warrant continued monitoring. When analyzing debt levels, the balance sheet is the obvious place to start. 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 Vivendi you should know.

At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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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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