Aurubis (ETR:NDA) Seems To Use Debt Quite Sensibly

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.' 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 can see that Aurubis AG (ETR:NDA) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Aurubis

What Is Aurubis's Debt?

The image below, which you can click on for greater detail, shows that Aurubis had debt of €249.0m at the end of June 2022, a reduction from €505.0m over a year. However, its balance sheet shows it holds €449.0m in cash, so it actually has €200.0m net cash.

How Healthy Is Aurubis' Balance Sheet?

The latest balance sheet data shows that Aurubis had liabilities of €2.26b due within a year, and liabilities of €1.08b falling due after that. Offsetting these obligations, it had cash of €449.0m as well as receivables valued at €1.16b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.73b.

This is a mountain of leverage relative to its market capitalization of €2.82b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Aurubis also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Aurubis grew its EBIT by 8.4% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Aurubis 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Aurubis 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 three years, Aurubis produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Aurubis does have more liabilities than liquid assets, it also has net cash of €200.0m. On top of that, it increased its EBIT by 8.4% in the last twelve months. So we don't have any problem with Aurubis's use of debt. 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 be aware of the 1 warning sign we've spotted with Aurubis .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.