We Think Accsys Technologies (LON:AXS) Is Taking Some Risk With Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Accsys Technologies PLC (LON:AXS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Accsys Technologies

What Is Accsys Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that Accsys Technologies had €54.5m of debt in September 2020, down from €57.6m, one year before. However, it does have €43.0m in cash offsetting this, leading to net debt of about €11.5m.

A Look At Accsys Technologies's Liabilities

We can see from the most recent balance sheet that Accsys Technologies had liabilities of €33.3m falling due within a year, and liabilities of €52.2m due beyond that. Offsetting these obligations, it had cash of €43.0m as well as receivables valued at €10.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €31.7m.

Given Accsys Technologies has a market capitalization of €246.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Accsys Technologies has a very low debt to EBITDA ratio of 1.0 so it is strange to see weak interest coverage, with last year's EBIT being only 2.2 times the interest expense. So while we're not necessarily alarmed we think that its debt is far from trivial. We also note that Accsys Technologies improved its EBIT from a last year's loss to a positive €7.2m. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Accsys Technologies 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Accsys Technologies saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Both Accsys Technologies's conversion of EBIT to free cash flow and its interest cover were discouraging. At least its net debt to EBITDA gives us reason to be optimistic. When we consider all the factors discussed, it seems to us that Accsys Technologies is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. 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. Be aware that Accsys Technologies is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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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