Here’s why Avis Budget Group (NASDAQ: CAR) has a heavy debt burden
Some say volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett said “volatility is far from risk.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that Avis Budget Group, Inc. (NASDAQ: CAR) has debt on its balance sheet. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, 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 painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest analysis for Avis Budget Group
What is Avis Budget Group’s net debt?
The graph below, which you can click for more details, shows Avis Budget Group had $ 14.8 billion in debt as of June 2021; about the same as the year before. However, it has $ 1.32 billion in cash offsetting that, leading to net debt of around $ 13.4 billion.
A look at the responsibilities of Avis Budget Group
Zooming in on the latest balance sheet data, we can see that Avis Budget Group had a liability of US $ 2.47 billion due within 12 months and a liability of US $ 19.5 billion due beyond. . In return, he had $ 1.32 billion in cash and $ 1.06 billion in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 19.5 billion.
This deficit casts a shadow over the $ 6.34 billion company like a towering colossus of mere mortals. We therefore believe that shareholders should watch it closely. Ultimately, Avis Budget Group would likely need a major recapitalization if its creditors demanded repayment.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we consider debt versus earnings with and without amortization charges.
Avis Budget Group shareholders are faced with the double whammy of a high net debt / EBITDA ratio (11.7) and relatively low interest coverage, since EBIT is only 1.8 times interest charges. The debt burden here is considerable. The silver lining is that Avis Budget Group increased its EBIT by 366% last year, which nurtures like idealism among the youth. If he can continue on this path, he will be able to deleverage with relative ease. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Avis Budget Group 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 repay its debts; accounting profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Avis Budget Group has actually generated more free cash flow than EBIT. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
We feel some trepidation about the level of difficulty of Avis Budget Group’s total liabilities, but we also have some bright spots to focus on. Its conversion of EBIT to free cash flow and the growth rate of EBIT were encouraging signs. Taking the above factors together, we believe Avis Budget Group debt presents certain risks to the business. So while this leverage increases returns on equity, we wouldn’t really want to see it increase from here. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example, Avis Budget Group has 3 warning signs (and 1 that shouldn’t be ignored) we think you should be aware of.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.
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