Aurubis (ETR:NDA) Takes On Some Risk With Its Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Aurubis AG (ETR:NDA) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Aurubis

What Is Aurubis's Net Debt?

The image below, which you can click on for greater detail, shows that Aurubis had debt of €190.0m at the end of June 2023, a reduction from €249.0m over a year. However, its balance sheet shows it holds €243.0m in cash, so it actually has €53.0m net cash.

How Healthy Is Aurubis' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aurubis had liabilities of €1.99b due within 12 months and liabilities of €1.02b due beyond that. On the other hand, it had cash of €243.0m and €836.0m worth of receivables due within a year. So its liabilities total €1.93b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Aurubis is worth €3.35b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Aurubis boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Aurubis if management cannot prevent a repeat of the 73% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Aurubis'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Aurubis may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Aurubis's free cash flow amounted to 21% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Aurubis's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €53.0m. So although we see some areas for improvement, we're not too worried about Aurubis's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Aurubis , and understanding them should be part of your investment process.

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.