Arcure (EPA:ALCUR) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Arcure S.A. (EPA:ALCUR) 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 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Arcure

What Is Arcure's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Arcure had debt of €5.98m, up from €4.23m in one year. On the flip side, it has €5.47m in cash leading to net debt of about €508.9k.

How Healthy Is Arcure's Balance Sheet?

We can see from the most recent balance sheet that Arcure had liabilities of €6.52m falling due within a year, and liabilities of €3.33m due beyond that. Offsetting this, it had €5.47m in cash and €4.00m in receivables that were due within 12 months. So its liabilities total €383.1k more than the combination of its cash and short-term receivables.

Given Arcure has a market capitalization of €17.9m, it's hard to believe these liabilities pose much threat. 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 Arcure 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.

In the last year Arcure wasn't profitable at an EBIT level, but managed to grow its revenue by 2.6%, to €9.9m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Arcure had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €3.7m. 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 €3.1m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Arcure that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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