Is AT & S Austria Technologie & Systemtechnik (VIE:ATS) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies AT & S Austria Technologie & Systemtechnik Aktiengesellschaft (VIE:ATS) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for AT & S Austria Technologie & Systemtechnik

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

The image below, which you can click on for greater detail, shows that at June 2024 AT & S Austria Technologie & Systemtechnik had debt of €1.77b, up from €1.51b in one year. However, it does have €725.7m in cash offsetting this, leading to net debt of about €1.04b.

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

Zooming in on the latest balance sheet data, we can see that AT & S Austria Technologie & Systemtechnik had liabilities of €1.03b due within 12 months and liabilities of €2.66b due beyond that. Offsetting these obligations, it had cash of €725.7m as well as receivables valued at €311.6m due within 12 months. So it has liabilities totalling €2.66b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €805.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, AT & S Austria Technologie & Systemtechnik would probably need a major re-capitalization if its creditors were to demand repayment.

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.

While we wouldn't worry about AT & S Austria Technologie & Systemtechnik's net debt to EBITDA ratio of 3.8, we think its super-low interest cover of 0.22 times is a sign of high leverage. It seems that the business incurs large depreciation and amortisation charges, so maybe its debt load is heavier than it would first appear, since EBITDA is arguably a generous measure of earnings. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. Even worse, AT & S Austria Technologie & Systemtechnik saw its EBIT tank 82% over the last 12 months. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if AT & S Austria Technologie & Systemtechnik can strengthen its balance sheet over time. 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 we always check how much of that EBIT is translated into 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

To be frank both AT & S Austria Technologie & Systemtechnik's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. And furthermore, its interest cover also fails to instill confidence. It looks to us like AT & S Austria Technologie & Systemtechnik carries a significant balance sheet burden. If you play with fire you risk getting burnt, so we'd probably give this stock a wide berth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for AT & S Austria Technologie & Systemtechnik you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.