Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Adevinta ASA (OB:ADEB) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Adevinta
What Is Adevinta's Net Debt?
The image below, which you can click on for greater detail, shows that Adevinta had debt of €151.7m at the end of June 2019, a reduction from €559.7m over a year. On the flip side, it has €64.9m in cash leading to net debt of about €86.8m.
How Strong Is Adevinta's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Adevinta had liabilities of €210.9m due within 12 months and liabilities of €294.7m due beyond that. On the other hand, it had cash of €64.9m and €153.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €287.2m.
Given Adevinta has a market capitalization of €7.27b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Adevinta has a very light debt load indeed.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Adevinta has a low net debt to EBITDA ratio of only 0.54. And its EBIT easily covers its interest expense, being 15.4 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Adevinta grew its EBIT by 43% over the last twelve months, and that growth will make it easier to handle its 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 Adevinta 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.