Is Aubay Société Anonyme (EPA:AUB) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Aubay Société Anonyme (EPA:AUB) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Aubay Société Anonyme

What Is Aubay Société Anonyme's Debt?

As you can see below, Aubay Société Anonyme had €7.82m of debt at December 2020, down from €12.8m a year prior. But it also has €52.5m in cash to offset that, meaning it has €44.6m net cash.

A Look At Aubay Société Anonyme's Liabilities

According to the last reported balance sheet, Aubay Société Anonyme had liabilities of €154.2m due within 12 months, and liabilities of €24.7m due beyond 12 months. Offsetting these obligations, it had cash of €52.5m as well as receivables valued at €165.8m due within 12 months. So it actually has €39.4m more liquid assets than total liabilities.

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

But the other side of the story is that Aubay Société Anonyme saw its EBIT decline by 2.9% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aubay Société Anonyme's ability to maintain a healthy balance sheet going forward. 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. Aubay Société Anonyme 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. During the last three years, Aubay Société Anonyme produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Aubay Société Anonyme has net cash of €44.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €46m, being 77% of its EBIT. So we don't think Aubay Société Anonyme's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Aubay Société Anonyme .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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. 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.
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