We think Iren (BIT: IRE) is taking risks with his debt
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether 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. Like many other companies Iren SpA (BIT: IRE) uses debt. But the most important question is: what risk does this debt create?
What risk does debt entail?
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. 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, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for Iren
How much debt does Iren have?
The image below, which you can click for more details, shows that in June 2021, Iren was in debt of € 3.98 billion, up from € 3.50 billion in a year. However, he also had 794.1 million euros in cash, so his net debt is 3.19 billion euros.
A look at Iren’s responsibilities
According to the latest published balance sheet, Iren had liabilities of € 1.64 billion within 12 months and liabilities of € 4.93 billion due beyond 12 months. On the other hand, it had cash of € 794.1 million and € 1.03 billion in receivables within one year. Its liabilities therefore amount to € 4.75 billion more than the combination of its cash and short-term receivables.
When you consider that this shortfall exceeds the company’s $ 3.58 billion market capitalization, you may well be inclined to carefully review the balance sheet. Hypothetically, an extremely large dilution would be required if the company was forced to repay its debts by raising capital at the current share price.
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). Thus, we consider debt versus earnings with and without amortization charges.
Iren’s net debt is 3.7 times its EBITDA, which represents significant leverage but still reasonable. However, its interest coverage of 10.3 is very high, suggesting that interest charges on debt are currently quite low. In particular, Iren’s EBIT has been fairly stable over the past year. Ideally, he can reduce his debt load by starting profit growth. When analyzing debt levels, the balance sheet is the obvious starting point. But it’s future profits, more than anything, that will determine Iren’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Iren has recorded free cash flow of 43% of its EBIT, which is lower than expected. It’s not great when it comes to paying down debt.
Our point of view
We would go so far as to say that Iren’s total liability level was disappointing. But on the bright side, his interest coverage is a good sign and makes us more optimistic. It should also be noted that companies in the integrated utilities sector like Iren generally use debt without a problem. Looking at the balance sheet and taking all of these factors into account, we think debt makes Iren’s stock a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. To do this, you need to know the 2 warning signs we spotted with Iren.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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 shares 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 documents. Simply Wall St has no position in the mentioned stocks.
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