Does MVV Energie (ETR:MVV1) have a healthy balance sheet?

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, MVV Energie SA (ETR:MVV1) is in debt. But the real question is whether this debt makes the business risky.

Why is debt risky?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, 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 mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for MVV Energie

What is MVV Energie’s net debt?

The graph below, which you can click on for more details, shows that MVV Energie had 1.98 billion euros in debt in March 2022; about the same as the previous year. However, he has €1.03 billion in cash to offset this, resulting in a net debt of around €954.3 million.

XTRA:MVV1 Debt to Equity June 23, 2022

A look at the liabilities of MVV Energie

According to the last published balance sheet, MVV Energie had liabilities of 15.4 billion euros at less than 12 months and liabilities of 3.59 billion euros at more than 12 months. On the other hand, it had 1.03 billion euros in cash and 14.6 billion euros in receivables at less than one year. It therefore has liabilities totaling 3.45 billion euros more than its cash and short-term receivables, combined.

The deficiency here weighs heavily on the 2.20 billion euro business itself, like a child struggling under the weight of a huge backpack full of books, his gym gear and a trumpet. So we definitely think shareholders need to watch this one closely. After all, MVV Energie would probably need a major recapitalization if it had to pay its creditors today.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

We would say that the moderate net debt/EBITDA ratio of MVV Energie (1.7), indicates the prudence in terms of leverage. And its strong interest coverage of 11.9 times puts us even more at ease. Additionally, we are pleased to report that MVV Energie has increased its EBIT by 50%, reducing the specter of future debt repayments. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since MVV Energie will need income to service this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

But our last consideration is also important, because a company cannot pay debt with profits on paper; he needs cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, MVV Energie has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our point of view

MVV Energie’s conversion of EBIT into free cash flow is a real plus in this analysis, as is its EBIT growth rate. On the other hand, our confidence has been shaken by his apparent struggle to manage his total liabilities. It should also be noted that companies in the Integrated Utilities sector such as MVV Energie routinely use debt without any problem. Given this range of data points, we believe that MVV Energie is in a good position to manage its level of indebtedness. That said, the charge is heavy enough that we recommend that any shareholder keep a close eye on it. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Know that MVV Energie presents 4 warning signs in our investment analysis and 1 of them concerns…

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Comments are closed.