We Think Aubay Société Anonyme (EPA:AUB) Can Manage Its Debt With Ease

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.' 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 is this debt a concern to shareholders?

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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. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Aubay Société Anonyme Carry?

The image below, which you can click on for greater detail, shows that Aubay Société Anonyme had debt of €1.77m at the end of December 2024, a reduction from €1.90m over a year. But it also has €113.7m in cash to offset that, meaning it has €112.0m net cash.

A Look At Aubay Société Anonyme's Liabilities

According to the last reported balance sheet, Aubay Société Anonyme had liabilities of €175.6m due within 12 months, and liabilities of €23.3m due beyond 12 months. Offsetting this, it had €113.7m in cash and €190.8m in receivables that were due within 12 months. So it can boast €105.6m more liquid assets than total liabilities.

It's good to see that Aubay Société Anonyme has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Aubay Société Anonyme has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Aubay Société Anonyme

While Aubay Société Anonyme doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Aubay Société Anonyme 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 generated free cash flow amounting to a very robust 87% 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 €112.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €53m, being 87% of its EBIT. So we don't think Aubay Société Anonyme's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 .

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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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.