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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Altheora SA (EPA:ALORA) does carry debt. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Altheora
What Is Altheora's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2023 Altheora had debt of €16.7m, up from €9.50m in one year. However, it also had €4.62m in cash, and so its net debt is €12.1m.
How Strong Is Altheora's Balance Sheet?
According to the last reported balance sheet, Altheora had liabilities of €13.4m due within 12 months, and liabilities of €15.1m due beyond 12 months. Offsetting these obligations, it had cash of €4.62m as well as receivables valued at €8.10m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €15.8m.
This deficit casts a shadow over the €8.87m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Altheora would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Altheora will need earnings to service that debt. 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.
In the last year Altheora wasn't profitable at an EBIT level, but managed to grow its revenue by 8.6%, to €38m. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months Altheora produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable €1.0m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of €1.8m. And until that time we think this is a risky stock. 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. Be aware that Altheora is showing 4 warning signs in our investment analysis , you should know about...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
About ENXTPA:ALORA
Slight with mediocre balance sheet.
