Yahoo Finance Is Bayerische Motoren Werke (FRA:BMW) Using Too Much Debt?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Bayerische Motoren Werke Aktiengesellschaft (FRA:BMW) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Bayerische Motoren Werke
How Much Debt Does Bayerische Motoren Werke Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Bayerische Motoren Werke had €111.1b of debt, an increase on €97.6b, over one year. However, because it has a cash reserve of €14.6b, its net debt is less, at about €96.4b.
How Strong Is Bayerische Motoren Werke's Balance Sheet?
According to the last reported balance sheet, Bayerische Motoren Werke had liabilities of €76.1b due within 12 months, and liabilities of €85.9b due beyond 12 months. Offsetting these obligations, it had cash of €14.6b as well as receivables valued at €4.22b due within 12 months. So it has liabilities totalling €143.2b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the €39.6b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt After all, Bayerische Motoren Werke would likely require a major re-capitalisation if it had to pay its creditors today.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
As it happens Bayerische Motoren Werke has a fairly concerning net debt to EBITDA ratio of 9.5 but very strong interest coverage of 1k. So either it has access to very cheap long term debt or that interest expense is going to grow! Importantly, Bayerische Motoren Werke's EBIT fell a jaw-dropping 34% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Bayerische Motoren Werke can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Bayerische Motoren Werke saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Our View
To be frank both Bayerische Motoren Werke's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. Considering all the factors previously mentioned, we think that Bayerische Motoren Werke really is carrying too much debt. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Bayerische Motoren Werke's dividend history, without delay!
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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