Does Aplicaciones y Tratamiento de Sistemas (BME:ATSI) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Aplicaciones y Tratamiento de Sistemas, S.A. (BME:ATSI) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Aplicaciones y Tratamiento de Sistemas

How Much Debt Does Aplicaciones y Tratamiento de Sistemas Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Aplicaciones y Tratamiento de Sistemas had €14.5m of debt, an increase on €8.14m, over one year. However, because it has a cash reserve of €9.53m, its net debt is less, at about €5.01m.

How Strong Is Aplicaciones y Tratamiento de Sistemas' Balance Sheet?

We can see from the most recent balance sheet that Aplicaciones y Tratamiento de Sistemas had liabilities of €35.6m falling due within a year, and liabilities of €19.8m due beyond that. Offsetting this, it had €9.53m in cash and €55.4m in receivables that were due within 12 months. So it actually has €9.50m more liquid assets than total liabilities.

This short term liquidity is a sign that Aplicaciones y Tratamiento de Sistemas could probably pay off its debt with ease, as its balance sheet is far from stretched.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Aplicaciones y Tratamiento de Sistemas's net debt is only 0.57 times its EBITDA. And its EBIT easily covers its interest expense, being 13.9 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. But the bad news is that Aplicaciones y Tratamiento de Sistemas has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is Aplicaciones y Tratamiento de Sistemas'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last two years, Aplicaciones y Tratamiento de Sistemas reported free cash flow worth 8.8% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

On our analysis Aplicaciones y Tratamiento de Sistemas's interest cover should signal that it won't have too much trouble with its debt. However, our other observations weren't so heartening. To be specific, it seems about as good at (not) growing its EBIT as wet socks are at keeping your feet warm. Looking at all this data makes us feel a little cautious about Aplicaciones y Tratamiento de Sistemas's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. For instance, we've identified 1 warning sign for Aplicaciones y Tratamiento de Sistemas that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.