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. As with many other companies Alcomet AD (BUL:6AM) makes use of 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Alcomet AD's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Alcomet AD had лв118.6m of debt, an increase on лв108.4m, over one year. On the flip side, it has лв3.26m in cash leading to net debt of about лв115.4m.
How Strong Is Alcomet AD's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Alcomet AD had liabilities of лв125.0m due within 12 months and liabilities of лв50.7m due beyond that. Offsetting this, it had лв3.26m in cash and лв57.8m in receivables that were due within 12 months. So it has liabilities totalling лв114.6m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of лв123.9m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Alcomet AD's earnings that will influence how the balance sheet holds up in the future. 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 Alcomet AD's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
Importantly, Alcomet AD had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at лв4.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled лв15m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should learn about the 3 warning signs we've spotted with Alcomet AD (including 2 which are a bit unpleasant) .
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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