Does AutoWallis Nyilvánosan Muködo Részvénytársaság (BUSE:AUTOWALLIS) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that AutoWallis Nyilvánosan Muködo Részvénytársaság (BUSE:AUTOWALLIS) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is AutoWallis Nyilvánosan Muködo Részvénytársaság's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 AutoWallis Nyilvánosan Muködo Részvénytársaság had debt of Ft74.6b, up from Ft45.0b in one year. However, because it has a cash reserve of Ft24.4b, its net debt is less, at about Ft50.2b.

How Healthy Is AutoWallis Nyilvánosan Muködo Részvénytársaság's Balance Sheet?

We can see from the most recent balance sheet that AutoWallis Nyilvánosan Muködo Részvénytársaság had liabilities of Ft95.7b falling due within a year, and liabilities of Ft45.9b due beyond that. On the other hand, it had cash of Ft24.4b and Ft21.2b worth of receivables due within a year. So it has liabilities totalling Ft96.0b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of Ft81.1b, we think shareholders really should watch AutoWallis Nyilvánosan Muködo Részvénytársaság's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

View our latest analysis for AutoWallis Nyilvánosan Muködo Részvénytársaság

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

AutoWallis Nyilvánosan Muködo Részvénytársaság's debt is 3.2 times its EBITDA, and its EBIT cover its interest expense 3.3 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. More concerning, AutoWallis Nyilvánosan Muködo Részvénytársaság saw its EBIT drop by 7.3% in the last twelve months. If that earnings trend continues the company will face an uphill battle to pay off its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine AutoWallis Nyilvánosan Muködo Részvénytársaság's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, AutoWallis Nyilvánosan Muködo Részvénytársaság actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

On the face of it, AutoWallis Nyilvánosan Muködo Részvénytársaság's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Once we consider all the factors above, together, it seems to us that AutoWallis Nyilvánosan Muködo Részvénytársaság's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. 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 AutoWallis Nyilvánosan Muködo Részvénytársaság , 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.