Is Aumann (ETR:AAG) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Aumann AG (ETR:AAG) does use debt in its business. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Aumann

What Is Aumann's Debt?

As you can see below, Aumann had €10.1m of debt at June 2022, down from €13.9m a year prior. But on the other hand it also has €97.3m in cash, leading to a €87.2m net cash position.

How Healthy Is Aumann's Balance Sheet?

We can see from the most recent balance sheet that Aumann had liabilities of €77.4m falling due within a year, and liabilities of €31.3m due beyond that. Offsetting these obligations, it had cash of €97.3m as well as receivables valued at €97.1m due within 12 months. So it actually has €85.7m more liquid assets than total liabilities.

This luscious liquidity implies that Aumann's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Aumann has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Aumann's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Aumann wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to €184m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Aumann?

Although Aumann had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €10m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Aumann you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.