Is Aubay Société Anonyme (EPA:AUB) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that Aubay Société Anonyme (EPA:AUB) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Aubay Société Anonyme

What Is Aubay Société Anonyme's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Aubay Société Anonyme had €4.66m of debt in December 2021, down from €7.82m, one year before. However, its balance sheet shows it holds €79.5m in cash, so it actually has €74.8m net cash.

How Strong Is Aubay Société Anonyme's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aubay Société Anonyme had liabilities of €166.9m due within 12 months and liabilities of €19.4m due beyond that. On the other hand, it had cash of €79.5m and €180.6m worth of receivables due within a year. So it actually has €73.8m more liquid assets than total liabilities.

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

Another good sign is that Aubay Société Anonyme has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Aubay Société Anonyme 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. During the last three years, Aubay Société Anonyme generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Aubay Société Anonyme has net cash of €74.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in €45m. So is Aubay Société Anonyme's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Aubay Société Anonyme that you should be aware of before investing here.

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.