Does AT & S Austria Technologie & Systemtechnik (VIE:ATS) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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 A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does AT & S Austria Technologie & Systemtechnik Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 AT & S Austria Technologie & Systemtechnik had €1.33b of debt, an increase on €834.2m, over one year. However, it also had €662.6m in cash, and so its net debt is €672.0m.

How Strong Is AT & S Austria Technologie & Systemtechnik's Balance Sheet?

According to the last reported balance sheet, AT & S Austria Technologie & Systemtechnik had liabilities of €519.1m due within 12 months, and liabilities of €1.54b due beyond 12 months. Offsetting this, it had €662.6m in cash and €376.0m in receivables that were due within 12 months. So its liabilities total €1.02b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because AT & S Austria Technologie & Systemtechnik is worth €1.94b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

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.

AT & S Austria Technologie & Systemtechnik's net debt to EBITDA ratio of about 2.3 suggests only moderate use of debt. And its commanding EBIT of 396 times its interest expense, implies the debt load is as light as a peacock feather. It is well worth noting that AT & S Austria Technologie & Systemtechnik's EBIT shot up like bamboo after rain, gaining 67% in the last twelve months. That'll make it easier to manage its debt. 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 AT & S Austria Technologie & Systemtechnik'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, AT & S Austria Technologie & Systemtechnik burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

AT & S Austria Technologie & Systemtechnik's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its interest cover. When we consider all the factors mentioned above, we do feel a bit cautious about AT & S Austria Technologie & Systemtechnik's use of debt. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example AT & S Austria Technologie & Systemtechnik has 3 warning signs (and 1 which is concerning) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.