Health Check: How Prudently Does Attica Holdings (ATH:ATTICA) Use 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. As with many other companies Attica Holdings S.A. (ATH:ATTICA) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Attica Holdings

What Is Attica Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Attica Holdings had €436.3m of debt, an increase on €399.9m, over one year. However, it also had €93.8m in cash, and so its net debt is €342.5m.

A Look At Attica Holdings' Liabilities

We can see from the most recent balance sheet that Attica Holdings had liabilities of €125.3m falling due within a year, and liabilities of €436.3m due beyond that. On the other hand, it had cash of €93.8m and €80.3m worth of receivables due within a year. So it has liabilities totalling €387.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €254.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Attica Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Attica Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Attica Holdings made a loss at the EBIT level, and saw its revenue drop to €330m, which is a fall of 6.0%. That's not what we would hope to see.

Caveat Emptor

Importantly, Attica Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €8.2m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of €22m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Attica Holdings (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.