Airtificial Intelligence Structures (BME:AI) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Airtificial Intelligence Structures, S.A. (BME:AI) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Airtificial Intelligence Structures

What Is Airtificial Intelligence Structures's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Airtificial Intelligence Structures had €90.5m of debt, an increase on €82.9m, over one year. However, because it has a cash reserve of €9.39m, its net debt is less, at about €81.1m.

A Look At Airtificial Intelligence Structures' Liabilities

The latest balance sheet data shows that Airtificial Intelligence Structures had liabilities of €91.1m due within a year, and liabilities of €50.7m falling due after that. Offsetting these obligations, it had cash of €9.39m as well as receivables valued at €55.8m due within 12 months. So it has liabilities totalling €76.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Airtificial Intelligence Structures has a market capitalization of €129.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Airtificial Intelligence Structures shareholders face the double whammy of a high net debt to EBITDA ratio (20.7), and fairly weak interest coverage, since EBIT is just 0.07 times the interest expense. This means we'd consider it to have a heavy debt load. One redeeming factor for Airtificial Intelligence Structures is that it turned last year's EBIT loss into a gain of €447k, over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Airtificial Intelligence Structures will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, Airtificial Intelligence Structures burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

On the face of it, Airtificial Intelligence Structures's interest cover left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. But at least its EBIT growth rate is not so bad. Overall, it seems to us that Airtificial Intelligence Structures's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Airtificial Intelligence Structures that you should be aware of before investing here.

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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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.