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 note that Aurubis AG (ETR:NDA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
Check out our latest analysis for Aurubis
What Is Aurubis's Debt?
The image below, which you can click on for greater detail, shows that at March 2021 Aurubis had debt of €510.0m, up from €110.8m in one year. But it also has €545.0m in cash to offset that, meaning it has €35.0m net cash.
How Strong Is Aurubis' Balance Sheet?
The latest balance sheet data shows that Aurubis had liabilities of €2.00b due within a year, and liabilities of €1.16b falling due after that. On the other hand, it had cash of €545.0m and €601.4m worth of receivables due within a year. So it has liabilities totalling €2.01b more than its cash and near-term receivables, combined.
This deficit isn't so bad because Aurubis is worth €3.41b, 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. 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.
Even more impressive was the fact that Aurubis grew its EBIT by 554% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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. 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. Over the most recent three years, Aurubis recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
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 €35.0m. And it impressed us with its EBIT growth of 554% over the last year. So we don't have any problem with Aurubis's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Aurubis that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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 XTRA:NDA
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