Mercedes-Benz Group (ETR:MBG) seems to be using debt quite wisely

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that Mercedes-Benz Group AG (ETR:MBG) has debt on its balance sheet. But does this debt worry shareholders?

What risk does debt carry?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for the Mercedes-Benz Group

What is the debt of the Mercedes-Benz group?

The image below, which you can click on for more details, shows that the Mercedes-Benz Group had a debt of 118.2 billion euros at the end of March 2022, compared to 146.9 billion euros over one year. . However, since it has a cash reserve of 20.1 billion euros, its net debt is less, at around 98.1 billion euros.

XTRA: MBG Debt to Equity History July 14, 2022

A look at the responsibilities of the Mercedes-Benz Group

Zooming in on the latest balance sheet data, we can see that the Mercedes-Benz Group had liabilities of €90.1 billion due within 12 months and liabilities of €89.5 billion due beyond. In return, it had 20.1 billion euros in cash and 7.40 billion euros in receivables due within 12 months. Thus, its liabilities total 152.1 billion euros more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the 55.1 billion euro business itself, like a child struggling under the weight of a huge backpack full of books, his gym gear and a trumpet. We would therefore be watching his balance sheet closely, no doubt. After all, the Mercedes-Benz Group would probably need a major recapitalization if it had to pay its creditors today.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

The Mercedes-Benz Group has a debt to EBITDA ratio of 4.8, which signals significant debt, but is still quite reasonable for most types of businesses. However, its interest coverage of 104 is very high, suggesting that debt interest charges are currently quite low. It should be noted that Mercedes-Benz Group’s EBIT jumped like bamboo after the rain, gaining 99% in the last twelve months. This will make it easier to manage your debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether the Mercedes-Benz Group can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. We therefore always check how much of this EBIT is converted into free cash flow. Fortunately for all shareholders, the Mercedes-Benz Group has actually produced more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our point of view

From what we have seen, the Mercedes-Benz Group does not find this easy, given its level of total liabilities, but the other factors we have taken into account give us cause for optimism. There is no doubt that its ability to cover its interest costs with its EBIT is quite flashy. When we consider all the factors mentioned above, we feel a bit cautious about the Mercedes-Benz Group’s use of debt. While we understand that debt can improve returns on equity, we suggest shareholders keep a close eye on their level of debt, lest it increase. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 2 warning signs for Mercedes-Benz Group (1 is potentially serious) of which you should be aware.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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