We Think Ayco Grupo Inmobiliario (BDM:AYC) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Ayco Grupo Inmobiliario, S.A. (BDM:AYC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ayco Grupo Inmobiliario

What Is Ayco Grupo Inmobiliario's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Ayco Grupo Inmobiliario had debt of €10.2m, up from €8.83m in one year. And it doesn't have much cash, so its net debt is about the same.

A Look At Ayco Grupo Inmobiliario's Liabilities

According to the last reported balance sheet, Ayco Grupo Inmobiliario had liabilities of €11.6m due within 12 months, and liabilities of €969.5k due beyond 12 months. Offsetting these obligations, it had cash of €155.6k as well as receivables valued at €1.62m due within 12 months. So its liabilities total €10.7m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €15.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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 47%, to €2.1m. 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. Indeed, it lost €830k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €1.6m 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 4 warning signs for Ayco Grupo Inmobiliario (2 are significant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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