Here's Why Asturiana de Laminados (BME:ELZ) Is Weighed Down By Its Debt Load

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Asturiana de Laminados, S.A. (BME:ELZ) does carry debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Asturiana de Laminados's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Asturiana de Laminados had €55.1m of debt in December 2024, down from €59.6m, one year before. However, it does have €1.36m in cash offsetting this, leading to net debt of about €53.7m.

How Healthy Is Asturiana de Laminados' Balance Sheet?

According to the last reported balance sheet, Asturiana de Laminados had liabilities of €51.4m due within 12 months, and liabilities of €72.3m due beyond 12 months. Offsetting these obligations, it had cash of €1.36m as well as receivables valued at €5.82m due within 12 months. So it has liabilities totalling €116.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €11.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Asturiana de Laminados would likely require a major re-capitalisation if it had to pay its creditors today.

See our latest analysis for Asturiana de Laminados

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). 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).

Weak interest cover of 0.25 times and a disturbingly high net debt to EBITDA ratio of 12.4 hit our confidence in Asturiana de Laminados like a one-two punch to the gut. The debt burden here is substantial. Looking on the bright side, Asturiana de Laminados boosted its EBIT by a silky 54% in the last year. Like the milk of human kindness that sort of growth increases resilience, making the company more capable of managing debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Asturiana de Laminados's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Asturiana de Laminados created free cash flow amounting to 9.5% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

To be frank both Asturiana de Laminados's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. We're quite clear that we consider Asturiana de Laminados to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. 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 Asturiana de Laminados (of which 3 are a bit unpleasant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.