Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Aurea SA (EPA:AURE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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. 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. 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 Aurea
What Is Aurea's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2023 Aurea had debt of €49.0m, up from €45.9m in one year. On the flip side, it has €26.1m in cash leading to net debt of about €22.9m.
A Look At Aurea's Liabilities
According to the last reported balance sheet, Aurea had liabilities of €88.2m due within 12 months, and liabilities of €50.9m due beyond 12 months. On the other hand, it had cash of €26.1m and €61.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €51.4m.
Given this deficit is actually higher than the company's market capitalization of €44.2m, we think shareholders really should watch Aurea's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Aurea 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.
Over 12 months, Aurea made a loss at the EBIT level, and saw its revenue drop to €238m, which is a fall of 5.0%. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months Aurea produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping €6.1m. 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. Not least because it burned through €205k in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for Aurea (of which 1 shouldn't be ignored!) you should know about.
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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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:AURE
Reasonable growth potential with adequate balance sheet.
