Is Allterco AD (BUL:A4L) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Allterco AD (BUL:A4L) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 Allterco AD

What Is Allterco AD's Net Debt?

As you can see below, Allterco AD had лв3.48m of debt at March 2020, down from лв4.16m a year prior. However, its balance sheet shows it holds лв14.0m in cash, so it actually has лв10.5m net cash.

How Healthy Is Allterco AD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Allterco AD had liabilities of лв5.52m due within 12 months and liabilities of лв2.59m due beyond that. On the other hand, it had cash of лв14.0m and лв3.04m worth of receivables due within a year. So it actually has лв8.91m more liquid assets than total liabilities.

It's good to see that Allterco AD has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Allterco AD boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Allterco AD has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Allterco 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Allterco AD may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Allterco AD created free cash flow amounting to 2.4% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Allterco AD has лв10.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 34% over the last year. So we don't think Allterco AD's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Allterco AD has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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