Does ABO-Group Environment (EBR:ABO) Have A Healthy Balance Sheet?

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.' 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. We note that ABO-Group Environment NV (EBR:ABO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ABO-Group Environment

How Much Debt Does ABO-Group Environment Carry?

The image below, which you can click on for greater detail, shows that at December 2020 ABO-Group Environment had debt of €14.1m, up from €9.86m in one year. However, its balance sheet shows it holds €15.0m in cash, so it actually has €878.0k net cash.

How Healthy Is ABO-Group Environment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ABO-Group Environment had liabilities of €27.9m due within 12 months and liabilities of €10.1m due beyond that. On the other hand, it had cash of €15.0m and €15.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €7.97m.

Given ABO-Group Environment has a market capitalization of €46.5m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, ABO-Group Environment boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that ABO-Group Environment grew its EBIT by 10% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ABO-Group Environment will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. ABO-Group Environment 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. Happily for any shareholders, ABO-Group Environment actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although ABO-Group Environment's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €878.0k. And it impressed us with free cash flow of €6.4m, being 166% of its EBIT. So is ABO-Group Environment's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for ABO-Group Environment you should be aware of.

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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This article by Simply Wall St is general in nature. 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.
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