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. 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. We can see that Acheter-Louer.Fr SA (EPA:ALALO) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Acheter-Louer.Fr's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2018 Acheter-Louer.Fr had debt of €503.0k, up from €263.0k in one year. But it also has €1.22m in cash to offset that, meaning it has €720.0k net cash.
A Look At Acheter-Louer.Fr's Liabilities
Zooming in on the latest balance sheet data, we can see that Acheter-Louer.Fr had liabilities of €1.28m due within 12 months and liabilities of €675.0k due beyond that. On the other hand, it had cash of €1.22m and €999.0k worth of receivables due within a year. So it actually has €272.0k more liquid assets than total liabilities.
This surplus suggests that Acheter-Louer.Fr has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Acheter-Louer.Fr boasts net cash, so it's fair to say it does not have a heavy debt load!
Acheter-Louer.Fr's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Acheter-Louer.Fr's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Acheter-Louer.Fr may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Acheter-Louer.Fr saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
While we empathize with investors who find debt concerning, you should keep in mind that Acheter-Louer.Fr has net cash of €720.0k, as well as more liquid assets than liabilities. So we don't have any problem with Acheter-Louer.Fr's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Acheter-Louer.Fr, you may well want to click here to check an interactive graph of its earnings per share history.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
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