Is Autoneum Holding (VTX:AUTN) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Autoneum Holding AG (VTX:AUTN) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Autoneum Holding

What Is Autoneum Holding's Net Debt?

As you can see below, Autoneum Holding had CHF588.4m of debt at June 2020, down from CHF745.3m a year prior. However, it does have CHF238.7m in cash offsetting this, leading to net debt of about CHF349.7m.

A Look At Autoneum Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Autoneum Holding had liabilities of CHF520.8m due within 12 months and liabilities of CHF890.1m due beyond that. On the other hand, it had cash of CHF238.7m and CHF233.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF938.6m.

This deficit casts a shadow over the CHF619.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Autoneum Holding would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Autoneum Holding'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.

Over 12 months, Autoneum Holding made a loss at the EBIT level, and saw its revenue drop to CHF1.9b, which is a fall of 18%. We would much prefer see growth.

Caveat Emptor

Not only did Autoneum Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CHF46m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CHF139m. And until that time we think this is a risky stock. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Autoneum Holding you should know about.

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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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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