Some people say that volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said, “Volatility is not synonymous with risk.” It's only natural to consider a company's balance sheet when you consider how risky it is, since debt is often involved when a business collapses.I understand that Global Business Travel Group Co., Ltd. (NYSE:GBTG) uses debt in its operations. But should shareholders be worried about its use of debt?
Why does debt pose a risk?
Debt supports a company until the company has difficulty paying it back with new capital or free cash flow. If the situation gets too bad, lenders may take control of the business. Although this is less common, we often see debt-laden companies permanently diluting shareholders as lenders force them to raise capital at distressed prices. Of course, many companies use debt to fund growth, and there are no negative consequences. When investigating debt levels, we first consider both cash and debt levels together.
Check out our latest analysis for Global Business Travel Group.
What is Global Business Travel Group's net debt?
The image below, which you can click on for greater detail, shows that Global Business Travel Group had debt of US$1.37b at December 2023, up from US$1.22b in one year. . On the other hand, the company has his cash of US$476m, leading to net debt of around US$891m.
How healthy is Global Business Travel Group's balance sheet?
According to its last reported balance sheet, Global Business Travel Group had liabilities of US$831m due within 12 months, and liabilities of US$1.71b due beyond 12 months. did. Offsetting this, it had cash of US$476m and receivables of US$790m due within 12 months. So its liabilities outweigh the sum of its cash and (short-term) receivables by US$1.27b.
Global Business Travel Group is valued at $2.76 billion, so this deficit is not too severe and could potentially raise enough capital to shore up its balance sheet if needed. However, it is clear that we need to take a close look at whether debt can be managed without dilution.
By looking at net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily earnings before interest and tax (EBIT) can cover interest, profitability can be calculated. Measures a company's debt load against. Expenses (interest burden). Therefore, we consider debt relative to earnings, with or without depreciation.
Global Business Travel Group's debt-to-EBITDA ratio (4.5) suggests that the company uses some debt, but its interest cover is very weak at 0.54, suggesting high leverage. Masu. The business appears to have incurred significant depreciation and amortization, and perhaps EBITDA is a good measure of profit, so the debt burden may be heavier than it appears. So shareholders should probably be aware that interest expense seems to have had a big impact on the business lately. However, the silver lining is that Global Business Travel Group achieved a positive EBIT of US$76m in the last twelve months, improving on the prior year's loss. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, Global Business Travel Group's ability to strengthen its balance sheet over the long term will depend on the future profitability of the business. So if you want to see what the experts think, you might find this free report on analyst profit forecasts to be interesting.
But final considerations are also important. This is because companies cannot pay their debts with paper profits. I need cold cash. So it's worth checking how much of its earnings before interest and tax (EBIT) is backed by free cash flow. Global Business Travel Group had free cash flow representing 64% of its EBIT, in the most recent year. This is about normal considering that free cash flow does not include interest and taxes. This ruthless cash means it can reduce debt if needed.
our view
Although Global Business Travel Group's interest coverage was very negative in this analysis, other factors we considered improved this analysis significantly. But on the bright side, its ability to convert EBIT to free cash flow isn't shabby at all. Taken together, we believe that Global Business Travel Group's debt poses some risk to the business. While this debt could boost earnings, we think the company currently has enough leverage. Given our concerns about the company's balance sheet, we think it would be wise to check if insiders have been selling shares recently.
If you're interested in investing in a business that allows you to grow profits without taking on debt, check this out free A list of growing companies that have net cash on their balance sheet.
Valuation is complex, but we help make it simple.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and the articles are not intended as financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
