Is Interwood-Xylemporia A.T.E.N.E (ATH:XYLEK) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Interwood-Xylemporia A.T.E.N.E. (ATH:XYLEK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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.

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

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

You can click the graphic below for the historical numbers, but it shows that Interwood-Xylemporia A.T.E.N.E had €30.2m of debt in June 2023, down from €32.9m, one year before. However, it does have €722.0k in cash offsetting this, leading to net debt of about €29.5m.

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 €24.3m due within 12 months, and liabilities of €12.4m due beyond 12 months. Offsetting this, it had €722.0k in cash and €15.0m in receivables that were due within 12 months. So its liabilities total €21.0m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €11.5m 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 definitely think shareholders need to watch this one closely. At the end of the day, Interwood-Xylemporia A.T.E.N.E would probably need a major re-capitalization if its creditors were to demand repayment.

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.

Weak interest cover of 0.90 times and a disturbingly high net debt to EBITDA ratio of 14.0 hit our confidence in Interwood-Xylemporia A.T.E.N.E like a one-two punch to the gut. The debt burden here is substantial. Worse, Interwood-Xylemporia A.T.E.N.E's EBIT was down 68% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Interwood-Xylemporia A.T.E.N.E will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Considering the last two years, Interwood-Xylemporia A.T.E.N.E actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

To be frank both Interwood-Xylemporia A.T.E.N.E's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. And even its net debt to EBITDA fails to inspire much confidence. It looks to us like Interwood-Xylemporia A.T.E.N.E carries a significant balance sheet burden. If you play with fire you risk getting burnt, so we'd probably give this stock a wide berth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Interwood-Xylemporia A.T.E.N.E (of which 2 are a bit unpleasant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.