Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Aluflexpack AG (VTX:AFP) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Aluflexpack
What Is Aluflexpack's Net Debt?
As you can see below, Aluflexpack had €23.6m of debt at December 2020, down from €29.0m a year prior. But on the other hand it also has €44.3m in cash, leading to a €20.8m net cash position.
How Healthy Is Aluflexpack's Balance Sheet?
We can see from the most recent balance sheet that Aluflexpack had liabilities of €69.1m falling due within a year, and liabilities of €39.3m due beyond that. On the other hand, it had cash of €44.3m and €29.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €35.1m.
Of course, Aluflexpack has a market capitalization of €532.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Aluflexpack boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Aluflexpack grew its EBIT by 401% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Aluflexpack's ability to maintain a healthy balance sheet going forward. 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. While Aluflexpack 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. Over the last three years, Aluflexpack saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing up
We could understand if investors are concerned about Aluflexpack's liabilities, but we can be reassured by the fact it has has net cash of €20.8m. And we liked the look of last year's 401% year-on-year EBIT growth. So we don't have any problem with Aluflexpack's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Aluflexpack, you may well want to click here to check an interactive graph of its earnings per share history.
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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About SWX:AFP
Good value with reasonable growth potential.
