Is AmRest Holdings (WSE:EAT) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, AmRest Holdings SE (WSE:EAT) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. 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 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 AmRest Holdings

What Is AmRest Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that AmRest Holdings had €757.2m in debt in March 2021; about the same as the year before. However, it does have €168.8m in cash offsetting this, leading to net debt of about €588.4m.

How Healthy Is AmRest Holdings' Balance Sheet?

According to the last reported balance sheet, AmRest Holdings had liabilities of €452.2m due within 12 months, and liabilities of €1.35b due beyond 12 months. Offsetting this, it had €168.8m in cash and €70.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.56b.

Given this deficit is actually higher than the company's market capitalization of €1.28b, we think shareholders really should watch AmRest Holdings's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 AmRest Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, AmRest Holdings made a loss at the EBIT level, and saw its revenue drop to €1.5b, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

Not only did AmRest Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €52m. Considering that alongside the liabilities mentioned above make us nervous 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 €160m. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - AmRest Holdings has 2 warning signs we think you should be aware of.

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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This article by Simply Wall St is general in nature. 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.
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