Warren Buffett famously said, '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 can see that Albena AD (BUL:ALB) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Albena AD's Debt?
The image below, which you can click on for greater detail, shows that Albena AD had debt of лв98.6m at the end of December 2020, a reduction from лв108.5m over a year. On the flip side, it has лв6.87m in cash leading to net debt of about лв91.7m.
How Healthy Is Albena AD's Balance Sheet?
According to the last reported balance sheet, Albena AD had liabilities of лв37.8m due within 12 months, and liabilities of лв108.8m due beyond 12 months. Offsetting these obligations, it had cash of лв6.87m as well as receivables valued at лв2.32m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by лв137.5m.
When you consider that this deficiency exceeds the company's лв132.9m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Albena AD 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.
In the last year Albena AD had a loss before interest and tax, and actually shrunk its revenue by 62%, to лв45m. To be frank that doesn't bode well.
While Albena AD's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping лв16m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through лв1.2m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Albena AD you should be aware of, and 1 of them is a bit unpleasant.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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