Andritz (VIE:ANDR) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Andritz AG (VIE:ANDR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Andritz

What Is Andritz's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Andritz had €1.29b of debt in March 2021, down from €1.34b, one year before. However, its balance sheet shows it holds €1.57b in cash, so it actually has €284.6m net cash.

How Strong Is Andritz's Balance Sheet?

We can see from the most recent balance sheet that Andritz had liabilities of €3.65b falling due within a year, and liabilities of €2.16b due beyond that. Offsetting this, it had €1.57b in cash and €1.98b in receivables that were due within 12 months. So its liabilities total €2.24b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Andritz has a market capitalization of €4.70b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Andritz boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Andritz has boosted its EBIT by 99%, thus reducing the spectre of future debt repayments. 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 Andritz'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. Andritz may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Andritz actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Andritz does have more liabilities than liquid assets, it also has net cash of €284.6m. And it impressed us with free cash flow of €386m, being 130% of its EBIT. So we don't think Andritz's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Andritz 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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