Here’s why Chorus (NZSE: CNU) is weighed down by its debt


Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Limited Choir (NZSE: CNU) uses debt. But does this debt concern shareholders?

Why Does Debt Bring Risk?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

See our latest analysis for Chorus

What is Chorus’ debt?

The chart below, which you can click for more details, shows Chorus owed NZ $ 3.02 billion in debt as of June 2021; about the same as the year before. And he doesn’t have a lot of cash, so his net debt is about the same.

NZSE: CNU History of debt to equity September 17, 2021

A look at the responsibilities of Chorus

The most recent balance sheet shows that Chorus had a liability of NZ $ 461.0 million maturing within one year and a liability of NZ $ 4.45 billion beyond. On the other hand, it had NZ $ 53.0 million in cash and NZ $ 145.0 million in receivables due within a year. Thus, its liabilities total NZ $ 4.71 billion more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the NZ $ 2.97 billion company like a towering colossus of mere mortals. So we would be watching its record closely, without a doubt. After all, Chorus would likely need a major recapitalization if it were to pay its creditors today.

We measure a company’s debt load relative to its earning capacity 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). Thus, we consider debt versus earnings with and without amortization charges.

The low interest coverage of 1.4 times and an unusually high Net Debt / EBITDA ratio of 5.2 affected our confidence in Chorus like a punch in the gut. This means that we would consider him to be in heavy debt. Another concern for investors could be that Chorus’ EBIT has fallen 11% over the past year. If this is the way things continue, managing the debt burden will be like delivering hot coffees on a pogo stick. 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 Chorus’ ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Chorus has burned a lot of money. While this may be the result of spending on growth, it makes debt much riskier.

Our point of view

To be frank, Chorus’ level of total liabilities and its history of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. And even his net debt to EBITDA doesn’t inspire much confidence. Considering all of the above factors, we believe Chorus is seriously in debt. For us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may think differently. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 2 warning signs for Chorus that you need to 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 documents. Simply Wall St has no position in the mentioned stocks.
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