These 4 Measures Indicate That Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság (BUSE:APPENINN) Is Using Debt Extensively

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.' 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. As with many other companies Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság (BUSE:APPENINN) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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.

See our latest analysis for Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság

How Much Debt Does Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság Carry?

As you can see below, at the end of June 2023, Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság had €99.5m of debt, up from €82.8m a year ago. Click the image for more detail. However, it also had €19.8m in cash, and so its net debt is €79.7m.

How Healthy Is Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság's Balance Sheet?

The latest balance sheet data shows that Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság had liabilities of €8.55m due within a year, and liabilities of €105.9m falling due after that. Offsetting these obligations, it had cash of €19.8m as well as receivables valued at €5.18m due within 12 months. So it has liabilities totalling €89.4m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €40.1m 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. At the end of the day, Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság 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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

As it happens Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság has a fairly concerning net debt to EBITDA ratio of 11.4 but very strong interest coverage of 1k. So either it has access to very cheap long term debt or that interest expense is going to grow! Notably, Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság's EBIT launched higher than Elon Musk, gaining a whopping 136% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

While Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság's level of total liabilities has us nervous. For example, its interest cover and conversion of EBIT to free cash flow give us some confidence in its ability to manage its debt. Looking at all the angles mentioned above, it does seem to us that Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Appeninn Vagyonkezelo Holding Nyilvánosan Muködo Részvénytársaság is showing 6 warning signs in our investment analysis , and 2 of those are concerning...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.