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.' 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 can see that Alcomet AD (BUL:ALCM) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
See our latest analysis for Alcomet AD
What Is Alcomet AD's Net Debt?
As you can see below, Alcomet AD had лв117.4m of debt at March 2021, down from лв126.5m a year prior. Net debt is about the same, since the it doesn't have much cash.
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 лв125.3m due within 12 months and liabilities of лв54.8m due beyond that. On the other hand, it had cash of лв718.0k and лв79.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by лв100.3m.
This deficit is considerable relative to its market capitalization of лв145.4m, so it does suggest shareholders should keep an eye on Alcomet AD's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Alcomet AD's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Alcomet AD reported revenue of лв359m, which is a gain of 3.5%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Alcomet AD had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost лв3.3m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of лв2.6m. So to be blunt we do think it is risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Alcomet AD (including 2 which are potentially serious) .
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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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About BUL:ALCM
Alcomet AD
Produces and sells flat-rolled and extruded aluminum products in Bulgaria.
Average dividend payer slight.
