David Iben said, “Volatility is not the risk we care about. What we care about is avoiding a permanent loss of capital. They seem to know that debt (usually associated with bankruptcies) is a very important factor when it comes to Schneider Electric SE (EPA:SU) takes advantage of debt. But should shareholders worry about the use of debt?
When does debt become a problem
Debt is a tool that helps companies grow, but if companies can’t pay back their lenders, they exist at their mercy. If things get really bad, the lender will have control over the business. But the more common (but still painful) scenario is that shareholders are permanently diluted as they have to raise new capital at a lower price. Of course, debt can be an important tool in business, especially in capital-heavy ones. When we think about the use of corporate debt, we first consider cash and debt together.
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How much debt does Schneider Electric have?
The image below, which can be clicked for more information, shows Schneider Electric’s debt reached €12.2 billion as of June 2022, up from €11.4 billion in one year. Conversely, it has cash of €3.03 billion and net debt of approximately €9.21 billion.
How healthy is Schneider Electric’s balance sheet?
According to the latest balance sheet data, Schneider Electric had €17.9 billion of debt due within one year and €11.8 billion of debt due after that. On the other hand, we had €3.03 billion in cash and €10.1 billion worth of receivables due within one year. The company’s liabilities therefore exceed its combined cash and (short-term) receivables by €16.5 billion.
This may seem like a lot but Schneider Electric has a huge market cap of €72.6bn so it’s not that bad and the potential to strengthen its balance sheet by raising capital if needed However, it is clear that we need to rigorously consider whether the debt can be managed without dilution.
We primarily use two ratios to show the level of debt to income. The first is Net Debt divided by Earnings Before Interest, Taxes, Depreciation, Amortization (EBITDA) and the second is Earnings Before Interest and Taxes (EBIT) equals interest expense (or interest for short). cover) is the number of times to cover. Therefore, we consider the liability to earnings with or without depreciation.
Schneider Electric’s net debt to EBITDA ratio of approximately 1.6 indicates moderate use of debt. And an impressive EBIT of 40.4 times interest expense means the debt burden is as light as a peacock feather. We also note that Schneider Electric increased its EBIT by 11% last year, making it easier to handle its debt burden. Clearly, the balance sheet is the starting point when analyzing debt levels. However, future earnings will determine, more than anything else, Schneider Electric’s ability to maintain a healthy balance sheet going forward. So, if you want to know what the experts think, this free report on analyst profit forecasts might be of interest to you.
But a final consideration is also important. Because a company cannot pay its debts with paper profits. I need cash. So it’s clear we need to see if that his EBIT is leading to corresponding free cash flow. Over the past three years, Schneider Electric has generated solid free cash flow representing his 72% of EBIT. This free cash flow allows the company to repay its debt if it needs to.
our view
The good news is that Schneider Electric has demonstrated its ability to cover interest costs with EBIT, delighting us like a fluffy puppy does a toddler. The good news doesn’t end there. The conversion of EBIT to free cash flow also supports that impression. Taking all this data into account, Schneider Electric seems to be taking a very prudent approach to debt. This is risky, but it also enhances shareholder returns. We believe tracking how fast earnings per share is growing is more important than most other metrics. If you’ve noticed that too, you’re in luck. Because today you can see for free an interactive chart showing his earnings per share history for Schneider Electric.
After all, it is often better to focus on companies with no net debt. Access a special list of such companies (all with a track record of profit growth). It’s free.
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Is not …