Does Interwood-Xylemporia A.T.E.N.E (ATH:XYLEK) Have A Healthy Balance Sheet?

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.' 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 Interwood-Xylemporia A.T.E.N.E. (ATH:XYLEK) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Interwood-Xylemporia A.T.E.N.E

What Is Interwood-Xylemporia A.T.E.N.E's Debt?

As you can see below, at the end of June 2022, Interwood-Xylemporia A.T.E.N.E had €32.9m of debt, up from €30.4m a year ago. Click the image for more detail. On the flip side, it has €1.12m in cash leading to net debt of about €31.8m.

How Healthy Is Interwood-Xylemporia A.T.E.N.E's Balance Sheet?

According to the last reported balance sheet, Interwood-Xylemporia A.T.E.N.E had liabilities of €24.5m due within 12 months, and liabilities of €16.6m due beyond 12 months. Offsetting these obligations, it had cash of €1.12m as well as receivables valued at €18.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €21.9m.

The deficiency here weighs heavily on the €7.49m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Interwood-Xylemporia A.T.E.N.E would likely require a major re-capitalisation if it had to pay its creditors today.

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.

With a net debt to EBITDA ratio of 5.8, it's fair to say Interwood-Xylemporia A.T.E.N.E does have a significant amount of debt. But the good news is that it boasts fairly comforting interest cover of 3.8 times, suggesting it can responsibly service its obligations. However, the silver lining was that Interwood-Xylemporia A.T.E.N.E achieved a positive EBIT of €5.1m in the last twelve months, an improvement on the prior year's loss. When analysing debt levels, the balance sheet is the obvious place to start. But it is Interwood-Xylemporia A.T.E.N.E's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Interwood-Xylemporia A.T.E.N.E 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

To be frank both Interwood-Xylemporia A.T.E.N.E's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least its EBIT growth rate is not so bad. Taking into account all the aforementioned factors, it looks like Interwood-Xylemporia A.T.E.N.E has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Interwood-Xylemporia A.T.E.N.E , and understanding them should be part of your investment process.

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.