These 4 measures indicate that the Bell Food Group (VTX: BELL) is using its debts reasonably well

Warren Buffett said: “Volatility is far from synonymous with risk”. 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, Bell Food Group AG (VTX: BELL) is in debt. But does this debt concern shareholders?

When Is Debt a Problem?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

Check out our latest analysis for Bell Food Group

What is Bell Food Group’s net debt?

As you can see below, Bell Food Group had a debt of CHF 867.7 million, as of June 2021, which is roughly the same as the year before. You can click on the graph for more details. However, given that it has a cash reserve of CHF 150.5 million, its net debt is lower, at around CHF 717.2 million.

Is Bell Food Group’s balance sheet healthy?

The latest balance sheet data shows that Bell Food Group had debts of CHF 606.5 million maturing within one year, and debts of CHF 772.8 million maturing thereafter. In compensation for these obligations, he had cash of CHF 150.5 million as well as receivables valued at CHF 429.1 million within 12 months. It therefore has liabilities totaling CHF 799.7 million more than its combined cash and short-term receivables.

While that may sound like a lot, it’s not so bad since Bell Food Group has a market capitalization of 1.84 billion francs, and could therefore probably strengthen its balance sheet by raising capital if necessary. However, it is always worth taking a close look at your ability to repay debts.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

We would say that Bell Food Group’s moderate net debt to EBITDA ratio (being 2.3) indicates leverage conservatism. And its imposing EBIT of 23.4 times its interest costs, means the debt burden is as light as a peacock feather. We note that Bell Food Group has increased its EBIT by 20% over the past year, which should make it easier to repay debt in the future. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Bell Food Group’s ability to maintain a healthy balance sheet in the future. 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. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Bell Food Group’s free cash flow has been 21% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.

Our point of view

Based on our analysis, Bell Food Group’s interest coverage should indicate that it will not have too many problems with its debt. However, our other observations were not so encouraging. For example, its conversion from EBIT to free cash flow makes us a little nervous about its debt. Given this range of data points, we believe the Bell Food Group is well positioned to manage its debt levels. That said, the load is heavy enough that we recommend that any shareholder watch it closely. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Know that Bell Food Group shows 2 warning signs in our investment analysis , you must know…

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

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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 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 any of the stocks mentioned.
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