Alten (EPA:ATE) Seems To Use Debt Rather Sparingly

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. Importantly, Alten S.A. (EPA:ATE) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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.

View our latest analysis for Alten

How Much Debt Does Alten Carry?

As you can see below, at the end of December 2021, Alten had €92.9m of debt, up from €87.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds €312.3m in cash, so it actually has €219.4m net cash.

How Strong Is Alten's Balance Sheet?

According to the last reported balance sheet, Alten had liabilities of €920.6m due within 12 months, and liabilities of €287.8m due beyond 12 months. Offsetting these obligations, it had cash of €312.3m as well as receivables valued at €1.03b due within 12 months. So it actually has €137.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Alten could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Alten boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Alten grew its EBIT by 122% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Alten's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Alten 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, Alten actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Alten has €219.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in €219m. So is Alten's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Alten, you may well want to click here to check an interactive graph of its earnings per share history.

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.