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 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. Importantly, Corticeira Amorim, S.G.P.S., S.A. (ELI:COR) does carry debt. But should shareholders be worried about its use of debt?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Corticeira Amorim S.G.P.S
You can click the graphic below for the historical numbers, but it shows that Corticeira Amorim S.G.P.S had €71.2m of debt in June 2022, down from €150.6m, one year before. But it also has €95.6m in cash to offset that, meaning it has €24.4m net cash.
The latest balance sheet data shows that Corticeira Amorim S.G.P.S had liabilities of €46.6m due within a year, and liabilities of €104.0m falling due after that. Offsetting this, it had €95.6m in cash and €231.6m in receivables that were due within 12 months. So it can boast €176.6m more liquid assets than total liabilities.
This surplus suggests that Corticeira Amorim S.G.P.S has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Corticeira Amorim S.G.P.S has more cash than debt is arguably a good indication that it can manage its debt safely.
And we also note warmly that Corticeira Amorim S.G.P.S grew its EBIT by 20% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Corticeira Amorim S.G.P.S's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Corticeira Amorim S.G.P.S may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Corticeira Amorim S.G.P.S generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
While we empathize with investors who find debt concerning, you should keep in mind that Corticeira Amorim S.G.P.S has net cash of €24.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €92m, being 98% of its EBIT. So we don't think Corticeira Amorim S.G.P.S's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Corticeira Amorim S.G.P.S , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Find out whether Corticeira Amorim S.G.P.S is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
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Corticeira Amorim, S.G.P.S., S.A. manufactures and sells cork and cork related products worldwide.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet, undervalued and pays a dividend.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
Corticeira Amorim, S.G.P.S., S.A. manufactures and sells cork and cork related products worldwide.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet, undervalued and pays a dividend.
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