Is ams-OSRAM (VTX:AMS) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, ams-OSRAM AG (VTX:AMS) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for ams-OSRAM

How Much Debt Does ams-OSRAM Carry?

You can click the graphic below for the historical numbers, but it shows that ams-OSRAM had €2.84b of debt in September 2022, down from €3.16b, one year before. However, because it has a cash reserve of €1.28b, its net debt is less, at about €1.56b.

How Strong Is ams-OSRAM's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ams-OSRAM had liabilities of €2.65b due within 12 months and liabilities of €3.44b due beyond that. Offsetting this, it had €1.28b in cash and €872.0m in receivables that were due within 12 months. So its liabilities total €3.93b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €2.56b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, ams-OSRAM would probably need a major re-capitalization if its creditors were to demand repayment. 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 ams-OSRAM'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.

Over 12 months, ams-OSRAM made a loss at the EBIT level, and saw its revenue drop to €4.9b, which is a fall of 6.7%. That's not what we would hope to see.

Caveat Emptor

Importantly, ams-OSRAM had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €36m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of €129m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. For example ams-OSRAM has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.

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

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.