Here's Why Augros Cosmetic Packaging (EPA:AUGR) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Augros Cosmetic Packaging SA (EPA:AUGR) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Augros Cosmetic Packaging

What Is Augros Cosmetic Packaging's Net Debt?

As you can see below, at the end of December 2020, Augros Cosmetic Packaging had €5.36m of debt, up from €2.12m a year ago. Click the image for more detail. However, it also had €3.63m in cash, and so its net debt is €1.72m.

How Healthy Is Augros Cosmetic Packaging's Balance Sheet?

According to the last reported balance sheet, Augros Cosmetic Packaging had liabilities of €5.32m due within 12 months, and liabilities of €5.21m due beyond 12 months. On the other hand, it had cash of €3.63m and €2.69m worth of receivables due within a year. So its liabilities total €4.21m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Augros Cosmetic Packaging is worth €7.08m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Augros Cosmetic Packaging 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.

Over 12 months, Augros Cosmetic Packaging made a loss at the EBIT level, and saw its revenue drop to €15m, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

Not only did Augros Cosmetic Packaging's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €501k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €124k of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Augros Cosmetic Packaging 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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