In This Article:
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. 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. We can see that Treasury Wine Estates Limited (ASX:TWE) does use debt in its business. But is this debt a concern to shareholders?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Treasury Wine Estates
What Is Treasury Wine Estates's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Treasury Wine Estates had debt of AU$1.17b, up from AU$879.6m in one year. On the flip side, it has AU$401.8m in cash leading to net debt of about AU$763.3m.
A Look At Treasury Wine Estates's Liabilities
According to the last reported balance sheet, Treasury Wine Estates had liabilities of AU$885.0m due within 12 months, and liabilities of AU$1.41b due beyond 12 months. Offsetting these obligations, it had cash of AU$401.8m as well as receivables valued at AU$634.6m due within 12 months. So its liabilities total AU$1.26b more than the combination of its cash and short-term receivables.
Since publicly traded Treasury Wine Estates shares are worth a total of AU$13.2b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
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.