David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Intertrust N.V. (AMS:INTER) does use debt in its business. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Intertrust
How Much Debt Does Intertrust Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Intertrust had €1.02b of debt, an increase on €789.3m, over one year. However, because it has a cash reserve of €97.0m, its net debt is less, at about €920.7m.
A Look At Intertrust's Liabilities
The latest balance sheet data shows that Intertrust had liabilities of €306.4m due within a year, and liabilities of €1.08b falling due after that. Offsetting these obligations, it had cash of €97.0m as well as receivables valued at €146.5m due within 12 months. So it has liabilities totalling €1.15b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of €1.61b, so it does suggest shareholders should keep an eye on Intertrust's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.