AmRest Holdings (WSE:EAT) Has Debt But No Earnings; Should You Worry?

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. As with many other companies AmRest Holdings SE (WSE:EAT) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for AmRest Holdings

What Is AmRest Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 AmRest Holdings had debt of €770.8m, up from €720.1m in one year. However, it also had €204.8m in cash, and so its net debt is €566.0m.

How Strong Is AmRest Holdings' Balance Sheet?

We can see from the most recent balance sheet that AmRest Holdings had liabilities of €478.1m falling due within a year, and liabilities of €1.37b due beyond that. Offsetting these obligations, it had cash of €204.8m as well as receivables valued at €67.7m due within 12 months. So it has liabilities totalling €1.58b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €1.48b 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. 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 AmRest Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year AmRest Holdings had a loss before interest and tax, and actually shrunk its revenue by 22%, to €1.5b. That makes us nervous, to say the least.

Caveat Emptor

While AmRest Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost €53m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of €182m. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with AmRest Holdings .

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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