Hellenic Telecommunications Organization (ATH:HTO) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘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. As with many other companies Hellenic Telecommunications Organization S.A. (ATH:HTO) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Hellenic Telecommunications Organization

What Is Hellenic Telecommunications Organization’s Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hellenic Telecommunications Organization had €847.7m of debt in December 2023, down from €1.05b, one year before. On the flip side, it has €469.5m in cash leading to net debt of about €378.2m.

A Look At Hellenic Telecommunications Organization’s Liabilities

According to the last reported balance sheet, Hellenic Telecommunications Organization had liabilities of €1.65b due within 12 months, and liabilities of €1.34b due beyond 12 months. Offsetting this, it had €469.5m in cash and €601.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.92b.

This deficit isn’t so bad because Hellenic Telecommunications Organization is worth €5.73b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Hellenic Telecommunications Organization has a low net debt to EBITDA ratio of only 0.27. And its EBIT easily covers its interest expense, being 37.2 times the size. So we’re pretty relaxed about its super-conservative use of debt. Fortunately, Hellenic Telecommunications Organization grew its EBIT by 5.9% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hellenic Telecommunications Organization’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it’s worth checking how much of that EBIT is backed by free cash flow. During the last three years, Hellenic Telecommunications Organization generated free cash flow amounting to a very robust 88% of its EBIT, more than we’d expect. That puts it in a very strong position to pay down debt.

Our View

Happily, Hellenic Telecommunications Organization’s impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Zooming out, Hellenic Telecommunications Organization seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we’ve identified 1 warning sign for Hellenic Telecommunications Organization that you should be aware of.

If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.