Is Maire Tecnimont (BIT:MT) using too much debt?

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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. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that Mayor Tecnimont SpA (BIT:MT) uses debt in its business. But the more important question is: what risk does this debt create?

When is debt a problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. 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, 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. When we think about a company’s use of debt, we first look at cash and debt together.

See our latest analysis for Maire Tecnimont

What is Maire Tecnimont’s net debt?

The graph below, which you can click on for more details, shows that Maire Tecnimont had €820.6m in debt in March 2022; about the same as the previous year. On the other hand, he has €777.9 million in cash, resulting in a net debt of around €42.8 million.

BIT: MT Debt to Equity History June 12, 2022

A look at Maire Tecnimont’s past

According to the last balance sheet published, Maire Tecnimont had liabilities of 3.36 billion euros at less than 12 months and liabilities of 860.6 million euros at more than 12 months. In return, it had 777.9 million euros in cash and 2.55 billion euros in receivables due within 12 months. It therefore has liabilities totaling 890.8 million euros more than its cash and short-term receivables, combined.

This deficit is considerable compared to its market capitalization of 1.04 billion euros, so it invites shareholders to monitor the use of debt by Maire Tecnimont. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.

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.

Maire Tecnimont has a low net debt to EBITDA ratio of just 0.30. And its EBIT easily covers its interest costs, which is 61.0 times the size. So we’re pretty relaxed about his super-conservative use of debt. On top of that, we are pleased to report that Maire Tecnimont increased its EBIT by 73%, reducing the specter of future debt repayments. The balance sheet is clearly the area to focus on when analyzing debt. But it is ultimately the company’s future profitability that will decide whether Maire Tecnimont can strengthen its balance sheet over time. 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 company cannot pay debt with paper profits; he needs cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Maire Tecnimont has recorded free cash flow representing 73% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.

Our point of view

The good news is that Maire Tecnimont’s demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a bit concerned about his total passive level. When we consider the range of factors above, it seems that Maire Tecnimont is quite sensitive with its use of debt. This means they take on a bit more risk, hoping to increase shareholder returns. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 1 warning sign for Mayor Tecnimont of which you should be aware.

If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this 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 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.

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