We believe Daimler (ETR: DAI) is taking risks with its debt
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Mostly, Daimler AG (ETR: DAI) carries the debt. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
See our latest review for Daimler
What is Daimler’s debt?
As you can see below, Daimler had 146.9 billion euros in debt in March 2021, up from 158.3 billion euros the year before. However, because it has a cash reserve of 27.6 billion euros, its net debt is lower, at around 119.4 billion euros.
Is Daimler’s Balance Sheet Healthy?
The latest balance sheet data shows that Daimler had liabilities of 107.0 billion euros due within one year, and liabilities of 120.3 billion euros due after that. On the other hand, it had cash of € 27.6 billion and € 9.91 billion in receivables within one year. Its liabilities therefore amount to 189.9 billion euros more than its combined cash and short-term receivables.
The shortfall here weighs heavily on the company itself, at € 85.3 billion, as if a child struggles under the weight of a huge backpack full of books, his sports equipment and sports gear. a trumpet. So we would be watching its record closely, without a doubt. Ultimately, Daimler would likely need a major recapitalization if its creditors demanded repayment.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Strangely, Daimler has a very high EBITDA ratio of 7.2, which implies high debt, but high interest coverage of 109. So, either he has access to very cheap long-term debt or his cost of doing so. interest will increase! Fortunately, Daimler is increasing its EBIT faster than former Australian Prime Minister Bob Hawke, gaining 885% in the past twelve months. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Daimler’s ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Daimler has recorded free cash flow of 23% of its EBIT, which is lower than expected. It’s not great when it comes to paying down debt.
Our point of view
At first glance, Daimler’s net debt to EBITDA left us hesitant about the stock, and his total liability level was no more appealing than the lone empty restaurant on the busiest night of the week. year. But on the bright side, his interest coverage is a good sign and makes us more optimistic. Looking at the balance sheet and taking all of these factors into account, we think debt makes Daimler stocks a bit risky. Some people like this kind of risk, but we are aware of the potential pitfalls, so we would probably prefer him to carry less debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Daimler has 2 warning signs (and 1 which is of concern) we think you should be aware of.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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