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.' 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. Importantly, ALBA SE (FRA:ABA) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for ALBA
What Is ALBA's Net Debt?
You can click the graphic below for the historical numbers, but it shows that ALBA had €6.66m of debt in December 2020, down from €9.40m, one year before. On the flip side, it has €388.0k in cash leading to net debt of about €6.27m.
A Look At ALBA's Liabilities
We can see from the most recent balance sheet that ALBA had liabilities of €34.8m falling due within a year, and liabilities of €27.9m due beyond that. Offsetting these obligations, it had cash of €388.0k as well as receivables valued at €133.4m due within 12 months. So it can boast €71.0m more liquid assets than total liabilities.
This short term liquidity is a sign that ALBA could probably pay off its debt with ease, as its balance sheet is far from stretched. But either way, ALBA has virtually no net debt, 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 it is ALBA's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, ALBA made a loss at the EBIT level, and saw its revenue drop to €259m, which is a fall of 22%. To be frank that doesn't bode well.
Caveat Emptor
Not only did ALBA's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost €2.4m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for ALBA (1 is potentially serious) you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. 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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About DB:ABA
Slight with mediocre balance sheet.
