We Think Allterco AD (BUL:A4L) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Allterco AD (BUL:A4L) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Allterco AD

How Much Debt Does Allterco AD Carry?

As you can see below, at the end of December 2020, Allterco AD had лв3.63m of debt, up from лв2.93m a year ago. Click the image for more detail. However, it does have лв28.3m in cash offsetting this, leading to net cash of лв24.7m.

A Look At Allterco AD's Liabilities

The latest balance sheet data shows that Allterco AD had liabilities of лв6.26m due within a year, and liabilities of лв2.55m falling due after that. On the other hand, it had cash of лв28.3m and лв9.46m worth of receivables due within a year. So it can boast лв29.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Allterco AD could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Allterco AD boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Allterco AD grew its EBIT by 152% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Allterco AD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Looking at the most recent three years, Allterco AD recorded free cash flow of 22% of its EBIT, which is weaker 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 лв24.7m in net cash and a decent-looking balance sheet. And we liked the look of last year's 152% year-on-year EBIT growth. So we don't think Allterco AD's use of debt is risky. 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. For example Allterco AD has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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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