Does Altech Advanced Materials (FRA:AMA) Have A Healthy Balance Sheet?

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.' 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. Importantly, Altech Advanced Materials AG (FRA:AMA) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Altech Advanced Materials

What Is Altech Advanced Materials's Net Debt?

As you can see below, at the end of June 2023, Altech Advanced Materials had €3.65m of debt, up from €114.0k a year ago. Click the image for more detail. On the flip side, it has €579.0k in cash leading to net debt of about €3.07m.

How Healthy Is Altech Advanced Materials' Balance Sheet?

According to the last reported balance sheet, Altech Advanced Materials had liabilities of €3.56m due within 12 months, and liabilities of €2.62m due beyond 12 months. On the other hand, it had cash of €579.0k and €36.7k worth of receivables due within a year. So its liabilities total €5.56m more than the combination of its cash and short-term receivables.

Of course, Altech Advanced Materials has a market capitalization of €95.3m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Altech Advanced Materials will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Given it has no significant operating revenue at the moment, shareholders will be hoping Altech Advanced Materials can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Importantly, Altech Advanced Materials had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €1.9m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €791k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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 - Altech Advanced Materials has 5 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.