David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We notice that Everi Holdings Inc. (NYSE: EVRI) has debt on its balance sheet. But the most 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, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing 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 of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest analysis for Everi Holdings
What is Everi Holdings’ debt?
You can click on the graph below for historical numbers, but it shows that as of March 2021, Everi Holdings had $ 1.13 billion in debt, an increase from $ 1.04 billion, on a year. However, he also had $ 340.1 million in cash, so his net debt is $ 790.0 million.
How healthy is Everi Holdings’ balance sheet?
We can see from the most recent balance sheet that Everi Holdings had liabilities of US $ 356.6 million due within one year and liabilities of US $ 1.17 billion due within one year. of the. In compensation for these obligations, it had cash of US $ 340.1 million as well as receivables valued at US $ 126.1 million within 12 months. Its liabilities therefore total US $ 1.06 billion more than the combination of its cash and short-term receivables.
This deficit is not that big of a deal as Everi Holdings is worth $ 1.87 billion, so it could probably raise enough capital to consolidate its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay your debt.
We measure a company’s debt load relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
While we’re not worried about Everi Holdings’ net debt to EBITDA ratio of 4.5, we do think its ultra-low 0.41 times interest coverage is a sign of high leverage. It appears the company incurs significant depreciation and amortization costs, so perhaps its debt load is heavier than it first appears, since EBITDA is arguably a generous measure of profits. Shareholders should therefore probably be aware that interest charges seem to have had a real impact on the company in recent times. Worse, the EBIT of Everi Holdings was down 64% compared to last year. If profits continue to follow this path, it will be more difficult to pay off this debt than to convince us to run a marathon in the rain. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Everi Holdings’ ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Everi Holdings has recorded free cash flow totaling 84% of its EBIT, which is higher than what we usually expected. This puts him in a very strong position to pay off the debt.
Our point of view
At first glance, Everi Holdings’ interest hedging left us hesitant about the stock, and its EBIT growth rate was no more attractive than the single empty restaurant on the busiest night of the year. But at least it’s pretty decent to convert EBIT into free cash flow; it’s encouraging. Looking at the balance sheet and taking all of these factors into account, we think debt makes Everi Holdings stock a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. 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. Concrete example: we have spotted 2 warning signs for Everi Holdings you must be aware.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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This Simply Wall St article is general in nature. 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 documents. Simply Wall St does not have any position in the mentioned stocks.
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