These 4 Measures Indicate That ASTARTA Holding (WSE:AST) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that ASTARTA Holding N.V. (WSE:AST) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ASTARTA Holding

How Much Debt Does ASTARTA Holding Carry?

As you can see below, ASTARTA Holding had ₴1.84b of debt at December 2020, down from ₴3.95b a year prior. However, it does have ₴823.3m in cash offsetting this, leading to net debt of about ₴1.02b.

A Look At ASTARTA Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that ASTARTA Holding had liabilities of ₴2.10b due within 12 months and liabilities of ₴3.92b due beyond that. Offsetting this, it had ₴823.3m in cash and ₴1.09b in receivables that were due within 12 months. So its liabilities total ₴4.10b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because ASTARTA Holding is worth ₴8.12b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Given net debt is only 0.35 times EBITDA, it is initially surprising to see that ASTARTA Holding's EBIT has low interest coverage of 2.0 times. So one way or the other, it's clear the debt levels are not trivial. Notably, ASTARTA Holding's EBIT launched higher than Elon Musk, gaining a whopping 862% on last year. 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 ASTARTA Holding'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Happily for any shareholders, ASTARTA Holding actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Happily, ASTARTA Holding's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. But we must concede we find its interest cover has the opposite effect. Taking all this data into account, it seems to us that ASTARTA Holding takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that ASTARTA Holding insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.

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