Is Altech Advanced Materials (FRA:AMA) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Altech Advanced Materials AG (FRA:AMA) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Altech Advanced Materials

What Is Altech Advanced Materials's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Altech Advanced Materials had €3.65m of debt, an increase on €116.4k, over one year. On the flip side, it has €579.0k in cash leading to net debt of about €3.07m.

A Look At Altech Advanced Materials' Liabilities

The latest balance sheet data shows that Altech Advanced Materials had liabilities of €4.5k due within a year, and liabilities of €6.89m falling due after that. Offsetting this, it had €579.0k in cash and €1.45m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.86m.

Since publicly traded Altech Advanced Materials shares are worth a total of €45.2m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Altech Advanced Materials's earnings that will influence how the balance sheet holds up in the future. 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 €1.5m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €979k in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Altech Advanced Materials (at least 4 which are potentially serious) , and understanding them should be part of your investment process.

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. 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.