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 seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We can see that Arcure S.A. (EPA:ALCUR) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.
View our latest analysis for Arcure
What Is Arcure’s Net Debt?
As you can see below, at the end of December 2019, Arcure had €4.23m of debt, up from €2.69m a year ago. Click the image for more detail. But it also has €6.84m in cash to offset that, meaning it has €2.60m net cash.
How Strong Is Arcure’s Balance Sheet?
The latest balance sheet data shows that Arcure had liabilities of €2.08m due within a year, and liabilities of €5.11m falling due after that. Offsetting this, it had €6.84m in cash and €3.94m in receivables that were due within 12 months. So it can boast €3.58m more liquid assets than total liabilities.
This surplus suggests that Arcure is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don’t think it will have any issues with its lenders. Succinctly put, Arcure boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Arcure can strengthen its balance sheet over time. 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 reported revenue of €11m, which is a gain of 20%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Arcure?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Arcure had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through €4.5m of cash and made a loss of €1.7m. But at least it has €2.60m on the balance sheet to spend on growth, near-term. Arcure’s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we’ve identified 4 warning signs for Arcure that you should be aware of.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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