Atomenergoremont (BUL:ATOM) Could Easily Take On More 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Atomenergoremont PLC (BUL:ATOM) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Atomenergoremont

How Much Debt Does Atomenergoremont Carry?

You can click the graphic below for the historical numbers, but it shows that Atomenergoremont had лв27.2m of debt in March 2024, down from лв46.6m, one year before. However, its balance sheet shows it holds лв47.9m in cash, so it actually has лв20.7m net cash.

A Look At Atomenergoremont's Liabilities

According to the last reported balance sheet, Atomenergoremont had liabilities of лв16.1m due within 12 months, and liabilities of лв25.2m due beyond 12 months. Offsetting these obligations, it had cash of лв47.9m as well as receivables valued at лв44.2m due within 12 months. So it actually has лв50.8m more liquid assets than total liabilities.

This surplus suggests that Atomenergoremont is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Atomenergoremont has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Atomenergoremont grew its EBIT by 173% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Atomenergoremont 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Atomenergoremont has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Atomenergoremont recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Atomenergoremont has лв20.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of лв29m, being 84% of its EBIT. When it comes to Atomenergoremont's debt, we sufficiently relaxed that our mind turns to the jacuzzi. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Atomenergoremont is showing 1 warning sign in our investment analysis , you should know about...

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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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.

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