Is Alfen (AMS:ALFEN) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Alfen N.V. (AMS:ALFEN) does have debt on its balance sheet. But is this debt a concern to shareholders?

We've discovered 1 warning sign about Alfen. View them for free.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Alfen's Debt?

You can click the graphic below for the historical numbers, but it shows that Alfen had €9.95m of debt in December 2024, down from €44.1m, one year before. However, its balance sheet shows it holds €17.1m in cash, so it actually has €7.12m net cash.

A Look At Alfen's Liabilities

According to the last reported balance sheet, Alfen had liabilities of €150.1m due within 12 months, and liabilities of €60.4m due beyond 12 months. On the other hand, it had cash of €17.1m and €132.9m worth of receivables due within a year. So its liabilities total €60.6m more than the combination of its cash and short-term receivables.

Since publicly traded Alfen shares are worth a total of €318.0m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Alfen also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Alfen'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.

Check out our latest analysis for Alfen

In the last year Alfen had a loss before interest and tax, and actually shrunk its revenue by 3.3%, to €488m. We would much prefer see growth.

So How Risky Is Alfen?

Although Alfen had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €31m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Alfen , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.