Here's Why Aurubis (ETR:NDA) Has A Meaningful Debt Burden

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.' 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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Aurubis

What Is Aurubis's Debt?

As you can see below, Aurubis had €233.8m of debt at March 2024, down from €249.8m a year prior. However, its balance sheet shows it holds €312.0m in cash, so it actually has €78.3m net cash.

A Look At Aurubis' Liabilities

The latest balance sheet data shows that Aurubis had liabilities of €2.30b due within a year, and liabilities of €1.07b falling due after that. Offsetting this, it had €312.0m in cash and €728.6m in receivables that were due within 12 months. So it has liabilities totalling €2.33b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €3.24b, so it does suggest shareholders should keep an eye on Aurubis' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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.

It is just as well that Aurubis's load is not too heavy, because its EBIT was down 71% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. In the last three years, Aurubis created free cash flow amounting to 6.9% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay 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 €78.3m. Despite its cash we think that Aurubis seems to struggle to grow its EBIT, so we are wary of the stock. 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. For example - Aurubis has 3 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.