Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Amoéba S.A. (EPA:ALMIB) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Amoéba
What Is Amoéba's Debt?
The image below, which you can click on for greater detail, shows that at December 2021 Amoéba had debt of €12.0m, up from €7.92m in one year. However, it does have €7.28m in cash offsetting this, leading to net debt of about €4.72m.
A Look At Amoéba's Liabilities
The latest balance sheet data shows that Amoéba had liabilities of €13.8m due within a year, and liabilities of €549.7k falling due after that. Offsetting these obligations, it had cash of €7.28m as well as receivables valued at €781.2k due within 12 months. So its liabilities total €6.25m more than the combination of its cash and short-term receivables.
Amoéba has a market capitalization of €19.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Amoéba will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
It seems likely shareholders hope that Amoéba can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
Caveat Emptor
Over the last twelve months Amoéba produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping €5.6m. 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 €4.4m of cash over the last year. So in short it's a really risky stock. 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 Amoéba has 5 warning signs (and 2 which shouldn't be ignored) we think you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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:ALMIB
Amoéba
Develops biological biocides for the prevention of microbiological risk for water, crop protection and health sectors.
Medium-low with weak fundamentals.