Is Aeffe (BIT:AEF) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Aeffe S.p.A. (BIT:AEF) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Aeffe

How Much Debt Does Aeffe Carry?

The chart below, which you can click on for greater detail, shows that Aeffe had €165.8m in debt in September 2023; about the same as the year before. However, it does have €11.3m in cash offsetting this, leading to net debt of about €154.6m.

How Healthy Is Aeffe's Balance Sheet?

We can see from the most recent balance sheet that Aeffe had liabilities of €219.4m falling due within a year, and liabilities of €167.2m due beyond that. Offsetting this, it had €11.3m in cash and €109.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €265.8m.

This deficit casts a shadow over the €91.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Aeffe would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Aeffe can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Aeffe made a loss at the EBIT level, and saw its revenue drop to €339m, which is a fall of 6.5%. That's not what we would hope to see.

Caveat Emptor

Importantly, Aeffe had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €18m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of €32m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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 Aeffe (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.