We think Amplifon (BIT:AMP) can manage its debt with ease

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. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Mostly, Amplifon SpA (BIT:AMP) is in debt. But should shareholders worry about its use of debt?

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

See our latest review for Amplifon

What is Amplifon’s debt?

The image below, which you can click on for more details, shows that in September 2021, Amplifon had a debt of 1.57 billion euros, compared to 1.15 billion euros in one year. However, because it has a cash reserve of €571.8 million, its net debt is lower, at around €997.2 million.

BIT: AMP Debt to Equity History March 9, 2022

A look at Amplifon’s responsibilities

We can see from the most recent balance sheet that Amplifon had liabilities of 845.8 million euros due in one year, and liabilities of 1.64 billion euros due beyond. In return for these obligations, it had cash of €571.8 million as well as receivables worth €226.4 million at less than 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €1.69 billion.

This shortfall is not that bad as Amplifon is worth 7.85 billion euros and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt.

We measure a company’s leverage against its earning power 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 charge (interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

We would say that Amplifon’s moderate net debt to EBITDA ratio (2.1) indicates prudence in terms of leverage. And its towering EBIT of 10.9 times its interest expense means that the debt burden is as light as a peacock feather. Above all, Amplifon has increased its EBIT by 52% in the last twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Amplifon 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, a business needs free cash flow to pay off its debts; book profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Fortunately for all shareholders, Amplifon 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

The good news is that Amplifon’s demonstrated ability to convert EBIT into free cash flow delights us like a fluffy puppy does a toddler. And this is only the beginning of good news since its EBIT growth rate is also very encouraging. We also note that healthcare companies like Amplifon routinely use debt without issue. Overall, we don’t think Amplifon is taking bad risks, as its leverage looks modest. So we are not worried about using a little leverage on the balance sheet. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 2 warning signs for Amplifon you should be aware.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

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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