David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Amadeus IT Group, S.A. (BME:AMS) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Amadeus IT Group Carry?
The image below, which you can click on for greater detail, shows that at December 2020 Amadeus IT Group had debt of €5.42b, up from €3.23b in one year. However, because it has a cash reserve of €2.51b, its net debt is less, at about €2.91b.
How Strong Is Amadeus IT Group's Balance Sheet?
According to the last reported balance sheet, Amadeus IT Group had liabilities of €2.39b due within 12 months, and liabilities of €5.55b due beyond 12 months. Offsetting these obligations, it had cash of €2.51b as well as receivables valued at €368.0m due within 12 months. So it has liabilities totalling €5.07b more than its cash and near-term receivables, combined.
Of course, Amadeus IT Group has a titanic market capitalization of €26.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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 €2.2b, which is a fall of 61%. That makes us nervous, to say the least.
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). To be specific the EBIT loss came in at €632m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €469m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. 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 .
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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