AURES Technologies (EPA:AURS) Has A Rock Solid Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that AURES Technologies S.A. (EPA:AURS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for AURES Technologies

What Is AURES Technologies's Debt?

As you can see below, AURES Technologies had €17.7m of debt at June 2021, down from €22.9m a year prior. But on the other hand it also has €23.2m in cash, leading to a €5.56m net cash position.

How Healthy Is AURES Technologies' Balance Sheet?

According to the last reported balance sheet, AURES Technologies had liabilities of €33.8m due within 12 months, and liabilities of €23.5m due beyond 12 months. On the other hand, it had cash of €23.2m and €17.1m worth of receivables due within a year. So its liabilities total €16.9m more than the combination of its cash and short-term receivables.

Of course, AURES Technologies has a market capitalization of €89.2m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, AURES Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that AURES Technologies grew its EBIT by 153% over twelve months. That boost will make it even easier to pay down debt going forward. 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 AURES Technologies 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. While AURES Technologies 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, AURES Technologies recorded free cash flow worth a fulsome 92% 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 AURES Technologies does have more liabilities than liquid assets, it also has net cash of €5.56m. And it impressed us with free cash flow of €6.8m, being 92% of its EBIT. So is AURES Technologies's debt a risk? It doesn't seem so to us. 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 instance, we've identified 1 warning sign for AURES Technologies that you should be aware of.

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.