Is BCE (TSE:BCE) Using Too Much Debt?

Simply Wall St · 09/01/2023 11:44

Warren Buffett famously said, '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. We can see that BCE Inc. (TSE:BCE) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for BCE

What Is BCE's Debt?

As you can see below, at the end of June 2023, BCE had CA$34.4b of debt, up from CA$30.3b a year ago. Click the image for more detail. On the flip side, it has CA$900.0m in cash leading to net debt of about CA$33.5b.

debt-equity-history-analysis
TSX:BCE Debt to Equity History September 1st 2023

How Strong Is BCE's Balance Sheet?

The latest balance sheet data shows that BCE had liabilities of CA$12.6b due within a year, and liabilities of CA$36.0b falling due after that. Offsetting these obligations, it had cash of CA$900.0m as well as receivables valued at CA$4.17b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$43.5b.

This is a mountain of leverage even relative to its gargantuan market capitalization of CA$52.2b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

BCE has a debt to EBITDA ratio of 3.9 and its EBIT covered its interest expense 4.2 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Given the debt load, it's hardly ideal that BCE's EBIT was pretty flat over the last twelve months. 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 BCE's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. In the last three years, BCE's free cash flow amounted to 40% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

On this analysis BCE's net debt to EBITDA and level of total liabilities both make us a little nervous. But at least its EBIT growth rate is not so bad. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making BCE stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for BCE (1 is a bit concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.