Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Iliad SA (EPA:ILD) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Iliad
What Is Iliad's Net Debt?
As you can see below, at the end of June 2019, Iliad had €5.06b of debt, up from €4.15b a year ago. Click the image for more detail. On the flip side, it has €453.0m in cash leading to net debt of about €4.61b.
How Healthy Is Iliad's Balance Sheet?
The latest balance sheet data shows that Iliad had liabilities of €3.56b due within a year, and liabilities of €6.90b falling due after that. Offsetting these obligations, it had cash of €453.0m as well as receivables valued at €1.06b due within 12 months. So it has liabilities totalling €8.95b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the €4.74b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt At the end of the day, Iliad would probably need a major re-capitalization if its creditors were to demand repayment.
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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).