Is Admicasa Holding (BRN:ADMI) A Risky Investment?

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 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 Admicasa Holding AG (BRN:ADMI) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Admicasa Holding

What Is Admicasa Holding's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Admicasa Holding had debt of CHF7.23m, up from CHF4.38m in one year. However, its balance sheet shows it holds CHF7.32m in cash, so it actually has CHF89.7k net cash.

A Look At Admicasa Holding's Liabilities

The latest balance sheet data shows that Admicasa Holding had liabilities of CHF8.57m due within a year, and liabilities of CHF6.13m falling due after that. On the other hand, it had cash of CHF7.32m and CHF1.53m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF5.84m.

This deficit isn't so bad because Admicasa Holding is worth CHF22.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Although Admicasa Holding made a loss at the EBIT level, last year, it was also good to see that it generated CHF3.3m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Admicasa Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Admicasa Holding 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. Looking at the most recent year, Admicasa Holding recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

Although Admicasa Holding's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CHF89.7k. So we are not troubled with Admicasa Holding's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Admicasa Holding (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.