Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that China Mengniu Dairy Company Limited (HKG:2319) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for China Mengniu Dairy
How Much Debt Does China Mengniu Dairy Carry?
As you can see below, at the end of June 2022, China Mengniu Dairy had CN¥36.0b of debt, up from CN¥23.0b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥16.6b, its net debt is less, at about CN¥19.4b.
SEHK:2319 Debt to Equity History August 28th 2022
How Strong Is China Mengniu Dairy's Balance Sheet?
According to the last reported balance sheet, China Mengniu Dairy had liabilities of CN¥29.5b due within 12 months, and liabilities of CN¥31.7b due beyond 12 months. Offsetting this, it had CN¥16.6b in cash and CN¥5.30b in receivables that were due within 12 months. So its liabilities total CN¥39.3b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because China Mengniu Dairy is worth a massive CN¥125.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
China Mengniu Dairy has a debt to EBITDA ratio of 3.2, which signals significant debt, but is still pretty reasonable for most types of business. However, its interest coverage of 1k is very high, suggesting that the interest expense on the debt is currently quite low. Notably China Mengniu Dairy's EBIT was pretty flat over the last year. We would prefer to see some earnings growth, because that always helps diminish debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if China Mengniu Dairy can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, China Mengniu Dairy reported free cash flow worth 7.7% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
Our View
China Mengniu Dairy's conversion of EBIT to free cash flow and net debt to EBITDA definitely weigh on it, in our esteem. But its interest cover tells a very different story, and suggests some resilience. Looking at all the angles mentioned above, it does seem to us that China Mengniu Dairy is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with China Mengniu Dairy .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
马克斯说得很好,他不是担心股价波动,而是我担心的是永久亏损的可能性……我认识的每个实际投资者都担心。因此,当你考虑到任何一只股票的风险有多大时,你需要考虑债务可能是显而易见的,因为太多的债务可能会让一家公司倒闭。我们可以看到蒙牛乳业股份有限公司(HKG:2319)确实在其业务中使用债务。但股东是否应该担心它的债务使用情况?
什么时候债务是个问题?
债务是帮助企业发展的一种工具,但如果一家企业无法偿还贷款人的债务,那么它就只能听从贷款人的摆布。在最糟糕的情况下,如果一家公司无法偿还债权人的债务,它可能会破产。然而,更常见(但代价仍然高昂)的情况是,一家公司必须以极低的价格发行股票,永久性地稀释股东的股份,只是为了支撑其资产负债表。然而,通过取代稀释,对于需要资本投资于高回报率增长的企业来说,债务可以成为一个非常好的工具。当我们检查债务水平时,我们首先同时考虑现金和债务水平。
看看我们对蒙牛乳业的最新分析
蒙牛乳业背负着多少债务?
如下所示,截至2022年6月底,蒙牛乳业的债务为360亿元人民币,而一年前为230亿元人民币。单击图像了解更多详细信息。然而,由于它拥有166亿元的现金储备,其净债务较少,约为194亿元。
联交所:2319债转股历史2022年8月28日
蒙牛乳业的资产负债表有多强?
根据最近一次上报的资产负债表,蒙牛乳业有295亿加元的负债在12个月内到期,317亿加元的负债在12个月后到期。作为抵消,它有166亿加元的现金和53亿加元的应收账款在12个月内到期。因此,其负债总额为人民币393亿元,超过了现金和短期应收账款的总和。
这一赤字并不是那么糟糕,因为蒙牛乳业的身家高达人民币1254亿元,因此如果需要的话,很可能会筹集到足够的资本来支撑其资产负债表。但很明显,我们绝对应该仔细检查它是否能够在不稀释的情况下管理债务。
为了评估一家公司的债务相对于它的收益,我们计算它的净债务除以它的利息、税项、折旧和摊销前收益(EBITDA)和它的利息和税前收益(EBIT)除以它的利息支出(它的利息覆盖)。因此,我们考虑债务相对于收益,包括折旧和摊销费用。
蒙牛乳业的债务与EBITDA之比为3.2,这意味着大量债务,但对于大多数类型的企业来说,这仍然是相当合理的。然而,其1k的利息覆盖率非常高,这表明债务的利息支出目前相当低。值得注意的是,蒙牛乳业去年的息税前利润相当持平。我们更希望看到一些收益增长,因为这总是有助于减少债务。在分析债务水平时,资产负债表显然是一个起点。但最终,该业务未来的盈利能力将决定蒙牛乳业能否随着时间的推移加强其资产负债表。因此,如果你想看看专业人士的想法,你可能会发现这份关于分析师利润预测的免费报告很有趣。
最后,企业需要自由现金流来偿还债务;会计利润只是不能削减这一点。因此,有必要检查这笔息税前利润中有多少是由自由现金流支持的。在过去的三年里,蒙牛乳业报告的自由现金流占其息税前利润的7.7%,这确实是相当低的。这种疲软的现金转换水平削弱了它管理和偿还债务的能力。
我们的观点
蒙牛乳业将息税前利润转换为自由现金流,将净债务转换为息税折旧摊销前利润,这无疑给它带来了压力,我们对此表示尊重。但它的利息封面讲述了一个非常不同的故事,并暗示了一些弹性。综上所述,在我们看来,由于蒙牛乳业的债务,它确实是一项有一定风险的投资。这不一定是一件坏事,因为杠杆可以提高股本回报率,但这是需要注意的。当你分析债务时,资产负债表显然是你关注的领域。但归根结底,每家公司都可能包含存在于资产负债表之外的风险。为此,您应该意识到1个警告标志我们已经看到了蒙牛乳业。
归根结底,关注那些没有净债务的公司往往更好。你可以访问我们的这类公司的特别名单(都有利润增长的记录)。这是免费的。
对这篇文章有什么反馈吗?担心内容吗? 保持联系直接与我们联系。或者,也可以给编辑组发电子邮件,地址是implywallst.com。
本文由Simply Wall St.撰写,具有概括性。我们仅使用不偏不倚的方法提供基于历史数据和分析师预测的评论,我们的文章并不打算作为财务建议。它不构成买卖任何股票的建议,也没有考虑你的目标或你的财务状况。我们的目标是为您带来由基本面数据驱动的长期重点分析。请注意,我们的分析可能不会将最新的对价格敏感的公司公告或定性材料考虑在内。Simply Wall St.对上述任何一只股票都没有持仓。