These 4 Measures Indicate That Alten (EPA:ATE) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Alten S.A. (EPA:ATE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Alten

How Much Debt Does Alten Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Alten had €222.7m of debt, an increase on €132.7m, over one year. However, it does have €284.4m in cash offsetting this, leading to net cash of €61.8m.

How Strong Is Alten's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Alten had liabilities of €1.18b due within 12 months and liabilities of €289.9m due beyond that. Offsetting these obligations, it had cash of €284.4m as well as receivables valued at €1.28b due within 12 months. So it can boast €90.4m more liquid assets than total liabilities.

This surplus suggests that Alten has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Alten boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Alten grew its EBIT by 90% over the last twelve months, and that growth will make it easier to handle its debt. 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 Alten 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, a company can only pay off debt with cold hard cash, not accounting profits. While Alten 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. Over the last three years, Alten recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Alten has €61.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €161m, being 86% of its EBIT. So is Alten's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Alten's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.