AST Groupe (EPA:ASP) Has A Rock Solid Balance Sheet

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.' 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 note that AST Groupe (EPA:ASP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 AST Groupe

What Is AST Groupe's Debt?

As you can see below, at the end of December 2020, AST Groupe had €35.8m of debt, up from €32.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds €57.2m in cash, so it actually has €21.5m net cash.

How Strong Is AST Groupe's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AST Groupe had liabilities of €82.0m due within 12 months and liabilities of €27.1m due beyond that. Offsetting this, it had €57.2m in cash and €27.8m in receivables that were due within 12 months. So its liabilities total €24.1m more than the combination of its cash and short-term receivables.

AST Groupe has a market capitalization of €83.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, AST Groupe boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, AST Groupe grew its EBIT by 131% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 AST Groupe 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While AST Groupe has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, AST Groupe generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While AST Groupe does have more liabilities than liquid assets, it also has net cash of €21.5m. And it impressed us with free cash flow of €21m, being 87% of its EBIT. So is AST Groupe's debt a risk? It doesn't seem so to us. 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 example - AST Groupe has 3 warning signs we think 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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