These 4 metrics indicate that Nexi (BIT: NEXI) is using debt reasonably well
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Above all, Nexi SpA (BIT: NEXI) carries the debt. But does this debt worry shareholders?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for Nexi
What is Nexi’s net debt?
You can click on the graph below for the historical figures, but it shows that as of June 2021, Nexi had a debt of 6.74 billion euros, an increase from 3.78 billion euros, over a year. However, because it has a cash reserve of 3.77 billion euros, its net debt is less, at around 2.97 billion euros.
How strong is Nexi’s balance sheet?
According to the latest published balance sheet, Nexi had liabilities of 677.2 million euros within 12 months and liabilities of 7.10 billion euros due beyond 12 months. On the other hand, it had cash of € 3.77 billion and € 1.26 billion in receivables within one year. It therefore has liabilities totaling 2.75 billion euros more than its combined cash and short-term receivables.
Considering that Nexi has a massive market cap of 13.9 billion euros, it’s hard to believe that these liabilities pose a threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.
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.
While Nexi’s debt-to-EBITDA ratio of 6.1 suggests heavy leverage, its interest coverage of 9.1 implies that it is servicing that debt with ease. Our best guess is that the company does have significant debt. It should be noted that Nexi’s EBIT has soared like bamboo after the rain, gaining 31% in the past twelve months. This will make it easier to manage your debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Nexi’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Nexi’s free cash flow has stood at 21% of its EBIT, less than we expected. This low cash conversion makes debt management more difficult.
Our point of view
Nexi’s net debt to EBITDA was really negative in this analysis, although the other factors we considered were considerably better. In particular, we are dazzled by its growth rate of EBIT. Given this range of data points, we believe Nexi is well positioned to manage its debt levels. But beware: we believe debt levels are high enough to warrant continued monitoring. The balance sheet is clearly the area 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, we have identified 3 warning signs for Nexi (2 should not be ignored) you should be aware.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow-growing stocks.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.