aap Implantate (ETR:AAQ1) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 aap Implantate AG (ETR:AAQ1) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for aap Implantate

How Much Debt Does aap Implantate Carry?

As you can see below, at the end of December 2020, aap Implantate had €2.34m of debt, up from none a year ago. Click the image for more detail. On the flip side, it has €1.18m in cash leading to net debt of about €1.16m.

A Look At aap Implantate's Liabilities

We can see from the most recent balance sheet that aap Implantate had liabilities of €5.01m falling due within a year, and liabilities of €4.40m due beyond that. On the other hand, it had cash of €1.18m and €1.82m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €6.42m.

This deficit is considerable relative to its market capitalization of €9.62m, so it does suggest shareholders should keep an eye on aap Implantate's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 aap Implantate'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, aap Implantate made a loss at the EBIT level, and saw its revenue drop to €10m, which is a fall of 20%. That makes us nervous, to say the least.

Caveat Emptor

Not only did aap Implantate's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable €7.9m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €4.1m of cash over the last year. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 4 warning signs we've spotted with aap Implantate (including 1 which makes us a bit uncomfortable) .

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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