The external fund manager led by Charlie Munger from Berkshire Hathaway, Li Lu, makes no secret of it when he says: “The greatest investment risk is not the volatility of prices, but whether you suffer a permanent loss of capital.” It is only natural to consider a company’s balance sheet when assessing how risky it is, as debt is often at play when a company breaks down. As with many other companies Reckitt Benckiser Group plc (LON: RKT) takes advantage of debt. But the more important question is, what is the risk this debt poses?
What is the risk of debt?
Debt supports a company until the company has difficulty paying it, either with new capital or with free cash flow. When things get really bad, lenders can take control of the business. However, a more common (but still expensive) situation is that a company needs to dilute shareholders on a cheap stock price just to get debt under control. Of course, many companies use debt to fund their growth without any negative consequences. When we think about using a company’s debt, let’s first look at cash and debt together.
Check out our latest analysis for the Reckitt Benckiser Group
What is the Reckitt Benckiser Group’s debt?
You can click the graph below to see the historical numbers, but it shows that the Reckitt Benckiser Group was in debt of £ 10.2 billion in December 2020, up from £ 11.9 billion the year before. On the flip side, it has £ 1.65 billion in cash, which results in a net debt of around £ 8.60 billion.
LSE: RKT Debt to Equity History June 21, 2021
How healthy is the Reckitt Benckiser Group’s balance sheet?
The most recent balance sheet shows that the Reckitt Benckiser Group had liabilities of £ 6.94 billion in one year and liabilities beyond that of £ 15.2 billion. On the flip side, the company had £ 1.65 billion in cash and £ 1.97 billion in receivables due within one year. So his debt is £ 18.5 billion more than the combination of cash and short-term receivables.
The Reckitt Benckiser Group has a very large market cap of £ 45.8 billion so it could very likely raise cash to improve its balance sheet if needed. Nevertheless, it is worthwhile to examine the debt repayment carefully.
We use two main metrics to help us understand debt versus revenue. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), and the second is how often earnings before interest and taxes (EBIT) cover its interest expense (or interest coverage for short). . In this way we take into account both the absolute amount of the debt and the interest paid on it.
The ratio of net debt to EBITDA of the Reckitt Benckiser Group of around 2.5 suggests only moderate use of outside capital. And its strong interest coverage of 14.6 times makes us even more comfortable. It is important that the Reckitt Benckiser Group’s EBIT remained largely unchanged over the past twelve months. We’d prefer some earnings growth because that always helps reduce debt. When analyzing debt levels, the obvious starting point is the balance sheet. But more than anything, it is future results that will determine the ability of the Reckitt Benckiser Group to maintain a healthy balance sheet in the future. So if you are focused on the future, this is what you can check out here free Analyst earnings forecast report.
After all, a business needs free cash flow to pay off debts; Accounting profits just don’t cut it off. So the logical step is to look at the portion of this EBIT that corresponds to the actual free cash flow. For the past three years, the Reckitt Benckiser Group has posted free cash flow of 63% of its EBIT, which is roughly normal as the free cash flow is excluding interest and taxes. This cold money means it can get rid of its debt if it wants to.
Our view
According to our analysis, the Reckitt Benckiser Group’s interest coverage should signal that it will not have too much trouble with its debt. But the other factors we mentioned above weren’t that encouraging. For example, based on its EBITDA, it seems like it is struggling a bit to manage its debt. Given this plethora of data points, we believe the Reckitt Benckiser Group is in a good position to manage its debt levels. However, the burden is so high that we recommend that all shareholders keep a close eye on it. When analyzing debt levels, the obvious starting point is the balance sheet. However, not the entire investment risk is on the balance sheet – on the contrary. These risks can be difficult to spot. Every company has them and we discovered them 3 warning signs for Reckitt Benckiser Group you should know.
If you’re interested in investing in companies that can grow profits without the burden of debt, then this is the place to be free List of growing companies that have net cash on their balance sheet.
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source https://dailyhealthynews.ca/reckitt-benckiser-group-lonrkt-seems-to-use-debt-quite-sensibly/
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