AUS
NZ
UK
CA
USA
IND
Highlights
- Seven Group Holdings carries a significant level of debt.
- The company’s debt is 3 times its EBITDA, with interest covered 3.8 times by EBIT.
- Cash flow conversion remains relatively low, limiting flexibility in managing debt.
Debt is often a crucial factor when evaluating the financial health of a company, especially in terms of potential risks. In the case of Seven Group Holdings Limited (ASX:SVW), debt plays a prominent role. While some debt can support growth, it's crucial to assess how manageable this debt is for the ASX industrial stock and its potential impact on shareholders.
Understanding the Debt Levels
As of June 2024, Seven Group Holdings had AU$5.05 billion in total debt, with AU$654.3 million in cash, resulting in a net debt of approximately AU$4.40 billion. While this level of debt has remained stable over the past year, it’s important to consider the company's ability to handle these obligations, especially given its large liabilities. Seven Group has AU$3.23 billion due within 12 months and AU$6.26 billion due in the longer term.
However, with a market value of AU$17.5 billion, Seven Group Holdings appears to have the capacity to raise additional capital if necessary, which could help manage these liabilities.
Evaluating Debt Coverage and Interest Payments
One way to evaluate a company's debt burden is by comparing it to earnings. For Seven Group Holdings, the debt is about 3.0 times its earnings before interest, tax, depreciation, and amortization (EBITDA). While this is a noticeable level of leverage, it is not unmanageable. Additionally, the company's earnings before interest and tax (EBIT) are 3.8 times its interest expenses, indicating that the company can cover its interest payments, though not with a wide margin.
Cash Flow and Future Outlook
While Seven Group Holdings has shown the ability to service its debt, one area that could raise concern is its cash flow. Over the last three years, the company converted only 15% of its EBIT into free cash flow. This low level of cash conversion can make it challenging for the company to pay down its debt effectively. Additionally, the company's EBIT has decreased by 3.8% over the past year, which could add further pressure.
The company's long-term ability to manage debt will depend heavily on its future profitability and whether it can improve its cash flow conversion.
Seven Group Holdings has the scale and assets to manage its current debt, its relatively low cash conversion and declining EBIT warrant attention. Maintaining a strong balance sheet and improving cash flow will be key to managing its debt and reducing risk moving forward.
