Here's Why Ayco Grupo Inmobiliario (BDM:AYC) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Ayco Grupo Inmobiliario, S.A. (BDM:AYC) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Ayco Grupo Inmobiliario

How Much Debt Does Ayco Grupo Inmobiliario Carry?

As you can see below, at the end of June 2021, Ayco Grupo Inmobiliario had €9.73m of debt, up from €8.53m a year ago. Click the image for more detail. However, because it has a cash reserve of €381.0k, its net debt is less, at about €9.35m.

How Healthy Is Ayco Grupo Inmobiliario's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ayco Grupo Inmobiliario had liabilities of €10.9m due within 12 months and liabilities of €969.5k due beyond that. Offsetting these obligations, it had cash of €381.0k as well as receivables valued at €1.13m due within 12 months. So it has liabilities totalling €10.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €14.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ayco Grupo Inmobiliario'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.

In the last year Ayco Grupo Inmobiliario had a loss before interest and tax, and actually shrunk its revenue by 73%, to €1.6m. That makes us nervous, to say the least.

Caveat Emptor

While Ayco Grupo Inmobiliario's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €912k. 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 €952k in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. We've identified 4 warning signs with Ayco Grupo Inmobiliario (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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.

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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.
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