Allterco AD (BUL:A4L) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Allterco AD (BUL:A4L) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Allterco AD

What Is Allterco AD's Debt?

The chart below, which you can click on for greater detail, shows that Allterco AD had лв2.77m in debt in June 2021; about the same as the year before. However, its balance sheet shows it holds лв29.3m in cash, so it actually has лв26.5m net cash.

A Look At Allterco AD's Liabilities

According to the last reported balance sheet, Allterco AD had liabilities of лв11.1m due within 12 months, and liabilities of лв2.29m due beyond 12 months. Offsetting this, it had лв29.3m in cash and лв9.67m in receivables that were due within 12 months. So it actually has лв25.6m more liquid assets than total liabilities.

This surplus suggests that Allterco AD has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Allterco AD boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Allterco AD grew its EBIT by 132% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Allterco AD's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Allterco AD 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. In the last three years, Allterco AD's free cash flow amounted to 34% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Allterco AD has лв26.5m in net cash and a decent-looking balance sheet. And we liked the look of last year's 132% year-on-year EBIT growth. So is Allterco AD's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Allterco AD (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.

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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