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Some say volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Atlantica Sustainable Infrastructure plc (NASDAQ: AY) uses debt in its business. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for Atlantica Sustainable Infrastructure
What is the net debt of Atlantica Sustainable Infrastructure?
As you can see below, at the end of June 2021, Atlantica Sustainable Infrastructure was in debt of $ 6.67 billion, up from $ 6.20 billion a year ago. Click on the image for more details. However, it has US $ 883.8 million in cash offsetting this, leading to net debt of around US $ 5.78 billion.
A look at the responsibilities of Atlantica Sustainable Infrastructure
We can see from the most recent balance sheet that Atlantica Sustainable Infrastructure had liabilities of US $ 901.1 million due within one year and liabilities of US $ 7.45 billion due within one year. -of the. In return, he had $ 883.8 million in cash and $ 312.2 million in receivables due within 12 months. It therefore has liabilities totaling US $ 7.16 billion more than its cash and short-term receivables combined.
The lack here weighs heavily on the $ 4.12 billion business itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. . So we would be watching its record closely, without a doubt. After all, Atlantica Sustainable Infrastructure would likely need a major recapitalization if it were to pay its creditors today.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Low interest coverage of 1.3 times and an unusually high Net Debt / EBITDA ratio of 7.6 shook our confidence in Atlantica Sustainable Infrastructure like a punch in the stomach. This means that we would consider him to be in heavy debt. Even more worrying, Atlantica Sustainable Infrastructure has seen its EBIT fall by 4.8% over the past twelve months. If this profit trend continues, the company will face an uphill battle to pay off its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Atlantica Sustainable Infrastructure can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts‘ earnings forecasts.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Fortunately for all shareholders, Atlantica Sustainable Infrastructure has actually generated more free cash flow than EBIT over the past three years. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
At first glance, Atlantica Sustainable Infrastructure’s net debt to EBITDA left us hesitant about the stock, and its total liability level was no more appealing than the single empty restaurant on the busiest night of the week. ‘year. But at least it’s pretty decent to convert EBIT into free cash flow; it’s encouraging. We’re pretty clear that we consider Atlantica Sustainable Infrastructure to be really quite risky, due to the health of its balance sheet. For this reason, we are fairly cautious about the stock, and we believe shareholders should keep a close eye on its liquidity. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 4 warning signs for Atlantica’s sustainable infrastructure (2 of which are potentially serious!) that you should be aware of.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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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 material. Simply Wall St has no position in the mentioned stocks.
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