Does AUTO1 Group (ETR:AG1) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies AUTO1 Group SE (ETR:AG1) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for AUTO1 Group

What Is AUTO1 Group's Debt?

As you can see below, at the end of June 2024, AUTO1 Group had €819.2m of debt, up from €534.1m a year ago. Click the image for more detail. On the flip side, it has €544.7m in cash leading to net debt of about €274.5m.

A Look At AUTO1 Group's Liabilities

The latest balance sheet data shows that AUTO1 Group had liabilities of €412.4m due within a year, and liabilities of €866.4m falling due after that. Offsetting this, it had €544.7m in cash and €270.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €463.5m.

This deficit isn't so bad because AUTO1 Group is worth €2.03b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AUTO1 Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, AUTO1 Group made a loss at the EBIT level, and saw its revenue drop to €5.6b, which is a fall of 6.9%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months AUTO1 Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €28m at the EBIT level. 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 €266m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like AUTO1 Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.