Here's Why Amadeus IT Group (BME:AMS) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Amadeus IT Group, S.A. (BME:AMS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for Amadeus IT Group

What Is Amadeus IT Group's Debt?

The image below, which you can click on for greater detail, shows that Amadeus IT Group had debt of €4.78b at the end of September 2021, a reduction from €5.62b over a year. However, because it has a cash reserve of €1.74b, its net debt is less, at about €3.04b.

A Look At Amadeus IT Group's Liabilities

The latest balance sheet data shows that Amadeus IT Group had liabilities of €1.74b due within a year, and liabilities of €5.56b falling due after that. On the other hand, it had cash of €1.74b and €319.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €5.24b.

Of course, Amadeus IT Group has a titanic market capitalization of €26.8b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Amadeus IT Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Amadeus IT Group made a loss at the EBIT level, and saw its revenue drop to €2.3b, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Amadeus IT Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost €349m 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. However, it doesn't help that it burned through €178m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Amadeus IT Group .

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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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.