These 4 measures indicate that Buzzi Unicem (BIT:BZU) is using debt reasonably well
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a 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. Like many other companies Buzzi Unicem SpA (BIT:BZU) uses debt. But should shareholders worry about its use of debt?
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Buzzi Unicem
What is Buzzi Unicem’s debt?
You can click on the chart below for historical figures, but it shows Buzzi Unicem had €1.14 billion in debt in December 2021, up from €1.24 billion a year earlier. But he also has €1.20 billion in cash to offset that, meaning he has €66.5 million in net cash.
A look at the responsibilities of Buzzi Unicem
We can see from the most recent balance sheet that Buzzi Unicem had liabilities of 673.5 million euros due in one year and liabilities of 1.87 billion euros due beyond. In return, it had 1.20 billion euros in cash and 530.3 million euros in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of €811.1 million.
Buzzi Unicem has a market capitalization of 3.21 billion euros, so it could very likely raise funds to improve its balance sheet, should the need arise. But we definitely want to keep our eyes peeled for indications that its debt is too risky. Despite its significant liabilities, Buzzi Unicem has a net cash position, so it is fair to say that it is not heavily indebted!
Fortunately, Buzzi Unicem has increased its EBIT by 3.8% over the last year, which makes this debt even more manageable. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Buzzi Unicem’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.
Finally, while the taxman may love accounting profits, lenders only accept cash. Although Buzzi Unicem has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it’s building ( or erodes) this treasury. balance. Over the past three years, Buzzi Unicem has produced strong free cash flow equivalent to 70% of its EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.
Although Buzzi Unicem’s balance sheet is not particularly strong, due to the total liabilities, it is clearly positive to see that it has a net cash position of 66.5 million euros. And he impressed us with a free cash flow of 377 million euros, or 70% of his EBIT. We therefore have no problem with the use of debt by Buzzi Unicem. Above most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you’ve also achieved this achievement, you’re in luck, because today you can view this interactive graph of Buzzi Unicem’s earnings per share history for free.
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.
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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.