Is Munic (EPA:ALMUN) Using Too Much Debt?

By
Simply Wall St
Published
December 11, 2021
ENXTPA:ALMUN
Source: Shutterstock

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. As with many other companies Munic S.A. (EPA:ALMUN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Munic

What Is Munic's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Munic had €7.07m of debt, an increase on €2.07m, over one year. However, because it has a cash reserve of €6.68m, its net debt is less, at about €384.0k.

debt-equity-history-analysis
ENXTPA:ALMUN Debt to Equity History December 11th 2021

How Strong Is Munic's Balance Sheet?

We can see from the most recent balance sheet that Munic had liabilities of €8.50m falling due within a year, and liabilities of €5.31m due beyond that. On the other hand, it had cash of €6.68m and €4.77m worth of receivables due within a year. So it has liabilities totalling €2.35m more than its cash and near-term receivables, combined.

Of course, Munic has a market capitalization of €19.2m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Munic can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Munic had a loss before interest and tax, and actually shrunk its revenue by 32%, to €13m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Munic's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €4.0m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €5.8m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Munic that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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