These 4 Measures Indicate That A.S. Création Tapeten (ETR:ACWN) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that A.S. Création Tapeten AG (ETR:ACWN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for A.S. Création Tapeten

How Much Debt Does A.S. Création Tapeten Carry?

You can click the graphic below for the historical numbers, but it shows that A.S. Création Tapeten had €9.91m of debt in September 2020, down from €15.3m, one year before. But on the other hand it also has €21.9m in cash, leading to a €12.0m net cash position.

How Strong Is A.S. Création Tapeten's Balance Sheet?

We can see from the most recent balance sheet that A.S. Création Tapeten had liabilities of €27.3m falling due within a year, and liabilities of €23.9m due beyond that. Offsetting this, it had €21.9m in cash and €28.9m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to A.S. Création Tapeten's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €50.7m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, A.S. Création Tapeten boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that A.S. Création Tapeten has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine A.S. Création Tapeten'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While A.S. Création Tapeten 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. During the last two years, A.S. Création Tapeten burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

We could understand if investors are concerned about A.S. Création Tapeten's liabilities, but we can be reassured by the fact it has has net cash of €12.0m. And we liked the look of last year's 46% year-on-year EBIT growth. So we are not troubled with A.S. Création Tapeten'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. Be aware that A.S. Création Tapeten is showing 3 warning signs in our investment analysis , 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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