Here's Why Airtificial Intelligence Structures (BME:AI) Can Afford Some Debt

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.' 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 Airtificial Intelligence Structures, S.A. (BME:AI) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Airtificial Intelligence Structures

What Is Airtificial Intelligence Structures's Debt?

As you can see below, Airtificial Intelligence Structures had €63.3m of debt at December 2020, down from €74.8m a year prior. However, it does have €6.97m in cash offsetting this, leading to net debt of about €56.3m.

A Look At Airtificial Intelligence Structures' Liabilities

Zooming in on the latest balance sheet data, we can see that Airtificial Intelligence Structures had liabilities of €61.8m due within 12 months and liabilities of €48.1m due beyond that. On the other hand, it had cash of €6.97m and €41.2m worth of receivables due within a year. So it has liabilities totalling €61.7m 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 €130.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Airtificial Intelligence Structures'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.

Over 12 months, Airtificial Intelligence Structures made a loss at the EBIT level, and saw its revenue drop to €83m, which is a fall of 6.1%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Airtificial Intelligence Structures produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €11m. 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 €12m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Airtificial Intelligence Structures (of which 2 are a bit concerning!) you should know about.

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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