Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ 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 note that BCE Inc. (TSE:BCE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for BCE

What Is BCE’s Net Debt?

The image below, which you can click on for greater detail, shows that BCE had debt of CA$24.4b at the end of March 2021, a reduction from CA$29.7b over a year. However, because it has a cash reserve of CA$2.61b, its net debt is less, at about CA$21.8b.

How Healthy Is BCE’s Balance Sheet?

The latest balance sheet data shows that BCE had liabilities of CA$9.53b due within a year, and liabilities of CA$32.4b falling due after that. Offsetting these obligations, it had cash of CA$2.61b as well as receivables valued at CA$3.81b due within 12 months. So it has liabilities totalling CA$35.5b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its very significant market capitalization of CA$56.1b, so it does suggest shareholders should keep an eye on BCE’s use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

BCE’s debt is 2.7 times its EBITDA, and its EBIT cover its interest expense 4.7 times over. Taken together this implies that, while we wouldn’t want to see debt levels rise, we think it can handle its current leverage. Sadly, BCE’s EBIT actually dropped 9.1% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if BCE can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, BCE recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

BCE’s EBIT growth rate and level of total liabilities definitely weigh on it, in our esteem. But the good news is it seems to be able to convert EBIT to free cash flow with ease. Looking at all the angles mentioned above, it does seem to us that BCE is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. For example BCE has 4 warning signs (and 1 which is significant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This column is an opinion by Mark Ting, a partner with Foundation Wealth who helps clients reach their financial goals. He can be heard every Thursday at 4:50 p.m. on CBC radio as On the Coast’s guide to personal finance. This column is part of CBC’s Opinion section. For more information about this section, please read our FAQ.

The high cost of real estate is often cited as the main barrier to entry into Vancouver’s housing market. As a result, some determined Canadians have turned to crowdfunding.  

In North America, there are several real estate crowdfunding companies that divide investable properties into fractional shares. I recently bought a fractional share of a rental development in Mission, B.C. This project’s crowdfund goal was $500,000 consisting of 500,000 shares at a dollar each.   

In total, about 1,000 people invested an average of nearly $500 to raise the half million. It is a longer-term holding with the developer building 105 units which include 11 affordable rental units over the next two years, then renting them out for three years before selling the units and dividing the profits among the investors.  

The reason I got involved in the Mission rental property crowdfund was two-fold. First, I agree with the crowdfund procurement team’s assessment about Mission — it has great capital appreciation and rental income potential — and second, I’m using this investment as a learning experience for my children.  

A learning experience 

For every ‘A’ my kids earn at school on their report cards, I give them $100. This year they decided to invest their earnings in real estate via crowdfunding. We chose the Mission project as it is local, which means we can visit the development, monitor its progress and experience, albeit in a small way, the sense of pride that often accompanies home ownership.

On behalf of my children, I invested $500 in the crowdfund which projects an annual return of 14 per cent. In dollar terms, if achieved, our investment would double in about five years. Yielding $500 in five years isn’t going to dramatically change my life, however, for my kids it’s likely to be much more impactful. My hope is that they continue to invest the money they earn for good grades into more projects, essentially building a small pipeline of investments with different risk profiles that pay out at different times. My goal for them is to form good financial habits which, if accomplished, is worth several times more than the potential $500 profit created by this investment.

When doing due diligence on crowdfunding, pay attention to the fees. Many offerings, in my opinion, overcharge or take an excessive cut of the profits. Before I invested, I compared the fee structures of various crowdfunding companies and ultimately went with a company that didn’t charge fees but instead were compensated via a subscription model. 

To participate in the Mission development, I had to first pay $25 for an annual subscription. Something to consider if you are only planning on making a small investment. For example, it doesn’t make financial sense to pay a $25 annual subscription fee if you only plan to invest $100 into a project. Aim to invest at least a couple hundred dollars —ideally a couple thousand dollars, into various projects throughout the year. 

Other factors to consider:

• The crowdfunding company’s management team experience and track record.

• The minimum investment amount which can be range from $1 to more than $250,000. 

• The expected returns of the investment versus the risk of the project.

• The time horizon of the project which usually ranges from two to five years and more.

Overall, I feel that real estate crowdfunding can be a viable tool for those who want to invest in real estate but are restricted due to a lack of money or credit. Small investments in multiple projects add up over time. That makes it appealing for young people who want to get in the habit of investing — which now can be done in real estate for as little as the cost of a daily cup of coffee.

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In the age of sustainability impact investing and ESG (Environmental, Social, and Governance), the non-financial factors that investors apply to identify material risks and growth opportunities, have become buzz terms. But not for everyone. According to research from new investment fund manager DUGUUD, this industry jargon leaves many people mystified and this is holding them back from investing in businesses that help the environment and society.

The survey of 3,000 adults found that just 10% were aware of the term impact investing and could explain it, yet when it was explained to them 60% agreed that it could create positive change in the environment and society. And three times more people agreed than disagreed that if they had funds to invest, they would want to invest in this area.

“It’s time for the whole financial services industry to ditch terms like impact investing and ESG and to start talking in a language everyone can understand,” says DUGUUD’s CEO and serial entrepreneur David Scrivens.

DUGUUD, the trading name of Amberside Capital, is an FCA-regulated fund manager launched this month, with a focus on climate change, increasing biodiversity, improving public health, reducing inequality, and improving education. It was born out of a need to create a platform that allows the general public to invest in companies that make a genuine and positive difference to the world.

“It is difficult and costly to create a fund that’s open to the public, and it takes a lot of marketing spend to reach them,” says Scrivens. “Most fund managers get institutional investors, such as pension funds, to meet the minimum investment level required to launch a fund, but this route is often to the exclusion of the general public.”

The research also revealed a significant level of cynicism, with 58% of respondents of the opinion that most businesses claiming to be doing good are actually spending more time and money marketing their environmental and societal intentions than on taking tangible actions. Two-thirds (67%) also agreed that there are now so many businesses claiming to run their business in a way that is better for the environment and society that they find it difficult to trust the real impact of most of their claims.

“It is extremely difficult to prove environmental and social change, and comparing organizations is also tricky,” says Scrivens. “There is no easy solution to this without government intervention to create tools for measuring impact.”

However, he insists that DUGUUD will not allow the companies it invests in to focus on just the one area of good they may be doing, but will hold them to account for all aspects of their business. They will also show investors tangible examples of what companies are doing, for example, how the company has moved to greener energy, not just by paying an electricity supplier to certify that they are getting green energy when it just comes through the grid, but by building additional green energy generation.

The team has already invested in several projects, including £17 million in Sterling Suffolk, which produces tomatoes in what has been dubbed ‘Europe’s cleverest greenhouse’. The semi-closed hydroponic glasshouse is considered 25% more energy efficient than a traditional one and allows for greater carbon absorption, and potentially creates better-tasting crops.

Wildanet is a Cornwall-based fiber company aiming to bring much-needed high-speed internet to rural communities in the region to improve digital inclusion. DUGUUD has raised the company around £50 million to help them achieve this goal.

Other investments include Virti, which trains medical staff remotely using virtual reality, and which has been incredibly valuable during the pandemic, and Ateria Health, which has developed a way to improve gut bacteria in humans that could help with common issues such as irritable bowel syndrome.

Another key finding of the research was that 67% of adults who were asked about investing would expect independent financial advisors (IFAs) to understand this area and supply options as part of the funds they discuss with customers, while 59% would also expect any pension provider to consider these kinds of investments in how they manage, invest and report on the pension fund.

This highlights the role that IFAs and pension firms have to play in creating more clarity for their clients around investing for positive change. “We believe that all professionals should be helping to spread the word about investing to make an improvement for society, and we aim to work with as many of them as possible,” says Scrivens.

Looking ahead, the plan is to create a fund that draws on the investment team’s infrastructure experience to make larger environmental and social projects come to fruition, and to launch a science-based fund focused on investment in technologies that can make a huge difference to the planet or society, but preferably both.

Scrivens adds: “We are also considering whether to offer a small part of our own company for individuals to invest in so that people can join us on our journey to make a real positive difference and help more companies that do good get the investment they need.”

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