Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Arcure S.A. (EPA:ALCUR) does use debt in its business. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Arcure
What Is Arcure's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2021 Arcure had debt of €5.74m, up from €5.14m in one year. However, it does have €4.18m in cash offsetting this, leading to net debt of about €1.56m.
A Look At Arcure's Liabilities
We can see from the most recent balance sheet that Arcure had liabilities of €2.40m falling due within a year, and liabilities of €8.14m due beyond that. Offsetting these obligations, it had cash of €4.18m as well as receivables valued at €5.12m due within 12 months. So it has liabilities totalling €1.25m more than its cash and near-term receivables, combined.
Given Arcure has a market capitalization of €19.6m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Arcure's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Arcure made a loss at the EBIT level, and saw its revenue drop to €11m, which is a fall of 7.9%. That's not what we would hope to see.
Caveat Emptor
Importantly, Arcure had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €2.9m. 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. However, it doesn't help that it burned through €2.8m of cash over the last year. So suffice it to say we consider the stock very risky. 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. We've identified 2 warning signs with Arcure , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
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About ENXTPA:ALCUR
Arcure
Develops artificial intelligence (AI) solutions for enhancing the autonomy of industrial machinery worldwide.
Undervalued with high growth potential.
