Is Cementir Holding (BIT:CEM) A Risky Investment?

Simply Wall St · 09/15/2023 04:51

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Cementir Holding N.V. (BIT:CEM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Cementir Holding

What Is Cementir Holding's Debt?

As you can see below, Cementir Holding had €210.7m of debt at June 2023, down from €266.7m a year prior. But it also has €245.5m in cash to offset that, meaning it has €34.9m net cash.

BIT:CEM Debt to Equity History September 15th 2023

A Look At Cementir Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Cementir Holding had liabilities of €500.3m due within 12 months and liabilities of €409.3m due beyond that. Offsetting this, it had €245.5m in cash and €303.9m in receivables that were due within 12 months. So it has liabilities totalling €360.2m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Cementir Holding has a market capitalization of €1.20b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Cementir Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Cementir Holding grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Cementir Holding 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 Cementir Holding 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. During the last three years, Cementir Holding generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Cementir Holding's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €34.9m. And it impressed us with free cash flow of €183m, being 81% of its EBIT. So is Cementir Holding's debt a risk? It doesn't seem so to us. We'd be very excited to see if Cementir Holding insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.