These 4 metrics indicate that Rubis (EPA: RUI) is using debt reasonably well

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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. 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 Ruby (EPA: RUI) uses debt in its business. But should shareholders be concerned about its use of debt?

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. 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.

See our latest analysis for Rubis

How many debts does Rubis have?

The graph below, which you can click for more details, shows that Rubis had € 1.33 billion in debt in June 2021; about the same as the year before. On the other hand, it has 933.7 million euros in cash, leading to a net debt of around 398.2 million euros.

ENXTPA: RUI Debt to Equity History October 5, 2021

A look at Rubis’ liabilities

We can see from the most recent balance sheet that Rubis had liabilities of 1.07 billion euros due within one year, and liabilities of 1.40 billion euros due beyond. In compensation for these obligations, he had cash of € 933.7 million as well as receivables valued at € 544.6 million within 12 months. Its liabilities therefore amount to € 994.9 million more than the combination of its cash and short-term receivables.

Rubis has a market capitalization of 3.15 billion euros, so it could most likely raise cash to improve its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky.

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.

Rubis has a low net debt to EBITDA ratio of just 0.87. And its EBIT covers its interest costs 15.9 times more. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Another good sign, Rubis was able to increase its EBIT by 21% in twelve months, thus facilitating the repayment of its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But in the end, it is the company’s future profitability that will decide whether Rubis can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Rubis has recorded free cash flow of 54% of its EBIT, which is close to normal, given that free cash flow is understood to be excluding interest and taxes. This hard cash allows him to reduce his debt whenever he wants.

Our point of view

The good news is that Rubis’ demonstrated ability to cover his interest costs with his EBIT delights us like a fluffy puppy does a toddler. And that’s just the start of good news as its EBIT growth rate is also very encouraging. It should also be noted that companies in the Gas Utilities industry such as Rubis currently use debt without any problem. When we consider the range of factors above, it seems that Ruby is pretty reasonable with its use of debt. While this carries some risk, it can also improve returns for shareholders. 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. For example, we have identified 2 warning signs for Rubis that you need to be aware of.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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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