Is Alfen (AMS:ALFEN) A Risky Investment?

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. We note that Alfen N.V. (AMS:ALFEN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Alfen

What Is Alfen's Net Debt?

The image below, which you can click on for greater detail, shows that Alfen had debt of €7.43m at the end of June 2021, a reduction from €8.57m over a year. But it also has €49.0m in cash to offset that, meaning it has €41.5m net cash.

How Healthy Is Alfen's Balance Sheet?

The latest balance sheet data shows that Alfen had liabilities of €62.0m due within a year, and liabilities of €17.6m falling due after that. Offsetting these obligations, it had cash of €49.0m as well as receivables valued at €56.6m due within 12 months. So it can boast €26.1m more liquid assets than total liabilities.

This state of affairs indicates that Alfen's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €1.85b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Alfen boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Alfen grew its EBIT by 72% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Alfen 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Alfen may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Alfen's free cash flow amounted to 28% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Alfen has net cash of €41.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 72% over the last year. So is Alfen's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that Alfen insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.