These 4 Measures Indicate That AT & S Austria Technologie & Systemtechnik (VIE:ATS) Is Using Debt Extensively

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that AT & S Austria Technologie & Systemtechnik Aktiengesellschaft (VIE:ATS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

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

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

As you can see below, AT & S Austria Technologie & Systemtechnik had €804.3m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have €432.5m in cash offsetting this, leading to net debt of about €371.8m.

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 €434.8m due within 12 months and liabilities of €832.4m due beyond that. Offsetting these obligations, it had cash of €432.5m as well as receivables valued at €229.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €605.7m.

This is a mountain of leverage relative to its market capitalization of €981.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

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). 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).

With a debt to EBITDA ratio of 1.7, AT & S Austria Technologie & Systemtechnik uses debt artfully but responsibly. And the alluring interest cover (EBIT of 8.0 times interest expense) certainly does not do anything to dispel this impression. Pleasingly, AT & S Austria Technologie & Systemtechnik is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 125% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding 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

Neither AT & S Austria Technologie & Systemtechnik's ability to convert EBIT to free cash flow nor its level of total liabilities gave us confidence in its ability to take on more debt. But the good news is it seems to be able to grow its EBIT with ease. Looking at all the angles mentioned above, it does seem to us that AT & S Austria Technologie & Systemtechnik 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 AT & S Austria Technologie & Systemtechnik has 3 warning signs (and 1 which can't be ignored) 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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