Is Aliaxis (EBR:094124352) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Aliaxis SA (EBR:094124352) does carry debt. But is this debt a concern to shareholders?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Aliaxis

How Much Debt Does Aliaxis Carry?

You can click the graphic below for the historical numbers, but it shows that Aliaxis had €319.2m of debt in December 2020, down from €1.14b, one year before. But on the other hand it also has €486.1m in cash, leading to a €167.0m net cash position.

A Look At Aliaxis' Liabilities

Zooming in on the latest balance sheet data, we can see that Aliaxis had liabilities of €741.7m due within 12 months and liabilities of €613.5m due beyond that. On the other hand, it had cash of €486.1m and €398.8m worth of receivables due within a year. So it has liabilities totalling €470.2m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Aliaxis is worth €1.37b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Aliaxis boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Aliaxis grew its EBIT by 13% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Aliaxis will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Aliaxis may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Aliaxis created free cash flow amounting to 18% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While Aliaxis does have more liabilities than liquid assets, it also has net cash of €167.0m. On top of that, it increased its EBIT by 13% in the last twelve months. So we don't have any problem with Aliaxis's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Aliaxis's earnings per share history for free.

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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