We Think Airtificial Intelligence Structures (BME:AI) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Airtificial Intelligence Structures, S.A. (BME:AI) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 2021 Airtificial Intelligence Structures had €78.2m of debt, an increase on €64.2m, over one year. However, it does have €4.81m in cash offsetting this, leading to net debt of about €73.4m.

A Look At Airtificial Intelligence Structures' Liabilities

The latest balance sheet data shows that Airtificial Intelligence Structures had liabilities of €69.7m due within a year, and liabilities of €45.9m falling due after that. Offsetting this, it had €4.81m in cash and €43.6m in receivables that were due within 12 months. So its liabilities total €67.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Airtificial Intelligence Structures is worth €125.6m, 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 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.

Over 12 months, Airtificial Intelligence Structures made a loss at the EBIT level, and saw its revenue drop to €77m, which is a fall of 13%. We would much prefer see growth.

Caveat Emptor

Not only did Airtificial Intelligence Structures's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable €20m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 €20m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Airtificial Intelligence Structures (2 are a bit concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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