Admicasa Holding (BRN:ADMI) Takes On Some Risk With Its Use Of Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Admicasa Holding AG (BRN:ADMI) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Admicasa Holding

What Is Admicasa Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that Admicasa Holding had CHF8.20m of debt in December 2021, down from CHF13.6m, one year before. But it also has CHF8.22m in cash to offset that, meaning it has CHF15.1k net cash.

How Strong Is Admicasa Holding's Balance Sheet?

According to the last reported balance sheet, Admicasa Holding had liabilities of CHF14.2m due within 12 months, and liabilities of CHF5.71m due beyond 12 months. Offsetting this, it had CHF8.22m in cash and CHF3.94m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF7.77m.

While this might seem like a lot, it is not so bad since Admicasa Holding has a market capitalization of CHF35.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Admicasa Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Admicasa Holding's load is not too heavy, because its EBIT was down 37% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Admicasa Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Admicasa Holding 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. Over the last three years, Admicasa Holding saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While Admicasa Holding does have more liabilities than liquid assets, it also has net cash of CHF15.1k. Despite its cash we think that Admicasa Holding seems to struggle to grow its EBIT, so we are wary of the 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. For instance, we've identified 2 warning signs for Admicasa Holding that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.