Health Check: How Prudently Does Aumann (ETR:AAG) Use 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. We note that Aumann AG (ETR:AAG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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.

Check out our latest analysis for Aumann

How Much Debt Does Aumann Carry?

The image below, which you can click on for greater detail, shows that Aumann had debt of €12.9m at the end of September 2021, a reduction from €16.6m over a year. However, its balance sheet shows it holds €57.6m in cash, so it actually has €44.7m net cash.

How Healthy Is Aumann's Balance Sheet?

The latest balance sheet data shows that Aumann had liabilities of €69.0m due within a year, and liabilities of €33.7m falling due after that. Offsetting this, it had €57.6m in cash and €101.5m in receivables that were due within 12 months. So it actually has €56.4m more liquid assets than total liabilities.

It's good to see that Aumann has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Aumann boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Aumann can strengthen its balance sheet over time. 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, Aumann made a loss at the EBIT level, and saw its revenue drop to €167m, which is a fall of 9.6%. We would much prefer see growth.

So How Risky Is Aumann?

While Aumann lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €1.9m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Aumann , 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.

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