We Think AT & S Austria Technologie & Systemtechnik (VIE:ATS) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft (VIE:ATS) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

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

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

The image below, which you can click on for greater detail, shows that at September 2022 AT & S Austria Technologie & Systemtechnik had debt of €1.37b, up from €1.16b in one year. However, it does have €1.13b in cash offsetting this, leading to net debt of about €239.4m.

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

We can see from the most recent balance sheet that AT & S Austria Technologie & Systemtechnik had liabilities of €1.03b falling due within a year, and liabilities of €1.80b due beyond that. Offsetting these obligations, it had cash of €1.13b as well as receivables valued at €536.3m due within 12 months. So its liabilities total €1.16b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €1.33b, 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

AT & S Austria Technologie & Systemtechnik has a low net debt to EBITDA ratio of only 0.47. And its EBIT covers its interest expense a whopping 20.5 times over. So we're pretty relaxed about its super-conservative use of debt. Even more impressive was the fact that AT & S Austria Technologie & Systemtechnik grew its EBIT by 221% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 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

Based on what we've seen AT & S Austria Technologie & Systemtechnik is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to cover its interest expense with its EBIT is pretty flash. 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 we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. To that end, you should be aware of the 2 warning signs we've spotted with AT & S Austria Technologie & Systemtechnik .

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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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.