Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Österreichische Post AG (VIE:POST) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Österreichische Post's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Österreichische Post had €30.2m of debt, an increase on €7.30m, over one year. But on the other hand it also has €393.6m in cash, leading to a €363.4m net cash position.
How Healthy Is Österreichische Post's Balance Sheet?
The latest balance sheet data shows that Österreichische Post had liabilities of €576.3m due within a year, and liabilities of €666.3m falling due after that. Offsetting these obligations, it had cash of €393.6m as well as receivables valued at €310.5m due within 12 months. So it has liabilities totalling €538.5m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Österreichische Post has a market capitalization of €1.99b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Österreichische Post boasts net cash, so it's fair to say it does not have a heavy debt load!
Another good sign is that Österreichische Post has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Österreichische Post can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Österreichische Post has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Österreichische Post recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Although Österreichische Post's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €363m. And we liked the look of last year's 25% year-on-year EBIT growth. So is Österreichische Post's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Österreichische Post's dividend history, without delay!
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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