AT & S Austria Technologie & Systemtechnik (VIE:ATS) Takes On Some Risk With Its Use Of Debt

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. Importantly, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft (VIE:ATS) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 AT & S Austria Technologie & Systemtechnik

What Is AT & S Austria Technologie & Systemtechnik's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 AT & S Austria Technologie & Systemtechnik had €1.22b of debt, an increase on €910.5m, over one year. On the flip side, it has €576.7m in cash leading to net debt of about €638.4m.

A Look At AT & S Austria Technologie & Systemtechnik's Liabilities

The latest balance sheet data shows that AT & S Austria Technologie & Systemtechnik had liabilities of €439.1m due within a year, and liabilities of €1.28b falling due after that. Offsetting this, it had €576.7m in cash and €283.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €857.1m.

This deficit is considerable relative to its market capitalization of €1.42b, so it does suggest shareholders should keep an eye on AT & S Austria Technologie & Systemtechnik's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

AT & S Austria Technologie & Systemtechnik's net debt is 2.6 times its EBITDA, which is a significant but still reasonable amount of leverage. However, its interest coverage of 14.0 is very high, suggesting that the interest expense on the debt is currently quite low. Pleasingly, AT & S Austria Technologie & Systemtechnik is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 108% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine AT & S Austria Technologie & Systemtechnik'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, AT & S Austria Technologie & Systemtechnik burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

While AT & S Austria Technologie & Systemtechnik's conversion of EBIT to free cash flow has us nervous. To wit both its interest cover and EBIT growth rate were encouraging signs. We think that AT & S Austria Technologie & Systemtechnik's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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 AT & S Austria Technologie & Systemtechnik that 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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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