Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a 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 can see that Millicom International Cellular SA (NASDAQ:TIGO) uses debt in its business. But does this debt worry shareholders?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. 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, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
Discover our latest analysis for Millicom International Cellular
What is Millicom International Cellular’s net debt?
You can click on the graph below for historical figures, but it shows that in December 2021, Millicom International Cellular had debt of US$7.75 billion, an increase from US$5.74 billion , over one year. However, he also had $895.0 million in cash, so his net debt is $6.85 billion.
How healthy is Millicom International Cellular’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Millicom International Cellular had liabilities of US$4.49 billion due within 12 months and liabilities of US$7.91 billion due beyond. On the other hand, it had cash of 895.0 million dollars and 620.0 million dollars of receivables within one year. Thus, its liabilities total $10.9 billion more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the $2.55 billion company, like a colossus towering above mere mortals. So we definitely think shareholders need to watch this one closely. Ultimately, Millicom International Cellular would likely need a major recapitalization if its creditors were to demand repayment.
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). Thus, we consider debt to earnings with and without amortization and depreciation expense.
While Millicom International Cellular’s debt to EBITDA ratio (4.6) suggests it uses some debt, its interest coverage is very low at 0.95, suggesting high leverage. It appears that the company is incurring significant depreciation and amortization costs, so perhaps its debt load is heavier than it appears at first glance, since EBITDA is undoubtedly a generous measure benefits. It seems clear that the cost of borrowing money is having a negative impact on shareholder returns lately. The good news is that Millicom International Cellular has grown its EBIT by 79% smoothly over the past twelve months. Like a mother’s loving embrace of a newborn, this kind of growth builds resilience, putting the company in a stronger position to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Millicom International Cellular 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, 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. Over the past three years, Millicom International Cellular has had negative free cash flow, overall. Debt is generally more expensive and almost always riskier in the hands of a company with negative free cash flow. Shareholders should hope for an improvement.
Our point of view
To be frank, Millicom International Cellular’s interest coverage and track record of keeping total liabilities under control makes us rather uncomfortable with its level of leverage. But at least it’s decent enough to increase its EBIT; it’s encouraging. We are quite clear that we consider Millicom International Cellular to be quite risky, given the health of its balance sheet. We are therefore almost as wary of this stock as a hungry kitten of falling into its owner’s fish pond: once bitten, twice shy, as they say. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we found 3 warning signs for Millicom International Cellular (2 are a little nasty!) that you should be aware of before investing here.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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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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