Does Allgeier (ETR:AEIN) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. We can see that Allgeier SE (ETR:AEIN) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Allgeier

How Much Debt Does Allgeier Carry?

As you can see below, Allgeier had €42.8m of debt at March 2021, down from €242.9m a year prior. But it also has €55.7m in cash to offset that, meaning it has €12.9m net cash.

How Healthy Is Allgeier's Balance Sheet?

We can see from the most recent balance sheet that Allgeier had liabilities of €89.9m falling due within a year, and liabilities of €76.3m due beyond that. On the other hand, it had cash of €55.7m and €59.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €51.4m.

While this might seem like a lot, it is not so bad since Allgeier has a market capitalization of €251.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Allgeier also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Allgeier made a loss at the EBIT level, last year, but improved that to positive EBIT of €13m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Allgeier 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Allgeier 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. Happily for any shareholders, Allgeier actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Allgeier does have more liabilities than liquid assets, it also has net cash of €12.9m. The cherry on top was that in converted 545% of that EBIT to free cash flow, bringing in €70m. So we are not troubled with Allgeier's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with Allgeier .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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