These 4 Measures Indicate That ALTEO Energiaszolgaltato Nyilvanosan Mukodo Reszvenytarsasag (BUSE:ALTEO) Is Using Debt Extensively

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that ALTEO Energiaszolgaltato Nyilvanosan Mukodo Reszvenytarsasag (BUSE:ALTEO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ALTEO Energiaszolgaltato Nyilvanosan Mukodo Reszvenytarsasag

How Much Debt Does ALTEO Energiaszolgaltato Nyilvanosan Mukodo Reszvenytarsasag Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 ALTEO Energiaszolgaltato Nyilvanosan Mukodo Reszvenytarsasag had Ft24.9b of debt, an increase on Ft21.5b, over one year. However, it does have Ft3.92b in cash offsetting this, leading to net debt of about Ft21.0b.

How Healthy Is ALTEO Energiaszolgaltato Nyilvanosan Mukodo Reszvenytarsasag's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ALTEO Energiaszolgaltato Nyilvanosan Mukodo Reszvenytarsasag had liabilities of Ft8.43b due within 12 months and liabilities of Ft27.9b due beyond that. On the other hand, it had cash of Ft3.92b and Ft6.60b worth of receivables due within a year. So its liabilities total Ft25.8b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's Ft24.2b market capitalization, you might well be inclined to review the balance sheet intently. 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). 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).

ALTEO Energiaszolgaltato Nyilvanosan Mukodo Reszvenytarsasag has a debt to EBITDA ratio of 3.9 and its EBIT covered its interest expense 2.8 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Looking on the bright side, ALTEO Energiaszolgaltato Nyilvanosan Mukodo Reszvenytarsasag boosted its EBIT by a silky 68% in the last year. Like the milk of human kindness that sort of growth increases resilience, making the company more capable of managing debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is ALTEO Energiaszolgaltato Nyilvanosan Mukodo Reszvenytarsasag'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, ALTEO Energiaszolgaltato Nyilvanosan Mukodo Reszvenytarsasag burned a lot of cash. 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

Mulling over ALTEO Energiaszolgaltato Nyilvanosan Mukodo Reszvenytarsasag's attempt at converting EBIT to free cash flow, we're certainly not enthusiastic. But at least it's pretty decent at growing its EBIT; that's encouraging. Overall, we think it's fair to say that ALTEO Energiaszolgaltato Nyilvanosan Mukodo Reszvenytarsasag has enough debt that there are some real risks around the balance sheet. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. 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. For example, we've discovered 3 warning signs for ALTEO Energiaszolgaltato Nyilvanosan Mukodo Reszvenytarsasag (2 make us uncomfortable!) that you should be aware of before investing here.

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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