Is Autoneum Holding (VTX:AUTN) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Autoneum Holding AG (VTX:AUTN) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Autoneum Holding

What Is Autoneum Holding's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Autoneum Holding had debt of CHF593.7m, up from CHF433.7m in one year. However, it does have CHF322.1m in cash offsetting this, leading to net debt of about CHF271.6m.

How Strong Is Autoneum Holding's Balance Sheet?

According to the last reported balance sheet, Autoneum Holding had liabilities of CHF520.3m due within 12 months, and liabilities of CHF874.2m due beyond 12 months. Offsetting these obligations, it had cash of CHF322.1m as well as receivables valued at CHF319.9m due within 12 months. So its liabilities total CHF752.5m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CHF787.6m, so it does suggest shareholders should keep an eye on Autoneum Holding's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Autoneum Holding 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.

Over 12 months, Autoneum Holding made a loss at the EBIT level, and saw its revenue drop to CHF1.7b, which is a fall of 24%. That makes us nervous, to say the least.

Caveat Emptor

While Autoneum Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CHF7.9m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CHF25m into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Autoneum Holding has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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