We think Wienerberger (VIE:WIE) can stay on top of its debt

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Warren Buffett said: “Volatility is far from synonymous with risk. 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. We can see that Wienerberger AG (VIE:WIE) uses debt in its business. But does this debt worry shareholders?

When is debt dangerous?

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. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for Wienerberger

What is Wienerberger’s net debt?

The image below, which you can click on for more details, shows that in March 2022, Wienerberger had a debt of 1.56 billion euros, compared to 1.48 billion euros in one year. However, because it has a cash reserve of €307.1m, its net debt is lower, at around €1.25bn.

WBAG:WIE Debt to Equity June 16, 2022

How healthy is Wienerberger’s balance sheet?

We can see from the most recent balance sheet that Wienerberger had liabilities of 1.10 billion euros maturing in one year, and liabilities of 1.67 billion euros due beyond. In return for these obligations, it had cash of €307.1 million as well as receivables worth €652.6 million at less than 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €1.81 billion.

This deficit is considerable compared to its market capitalization of 2.71 billion euros, so he suggests that shareholders monitor Wienerberger’s use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Wienerberger’s net debt to EBITDA ratio of around 1.7 suggests only moderate debt utilization. And its strong interest coverage of 14.6 times makes us even more comfortable. On top of that, we are pleased to report that Wienerberger increased its EBIT by 79%, reducing the specter of future debt repayments. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Wienerberger’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

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, Wienerberger has produced strong free cash flow equivalent to 69% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.

Our point of view

Wienerberger’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But truth be told, we think his total passive level undermines that impression a bit. When we consider the range of factors above, it seems that Wienerberger is quite sensible with his use of debt. This means they take on a bit more risk, hoping to increase shareholder returns. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 3 warning signs for Wienerberger (1 cannot be ignored!) which you should be aware of before investing here.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

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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