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, ATM Grupa S.A. (WSE:ATG) does carry debt. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 ATM Grupa
How Much Debt Does ATM Grupa Carry?
The image below, which you can click on for greater detail, shows that ATM Grupa had debt of zł22.9m at the end of September 2020, a reduction from zł28.4m over a year. But on the other hand it also has zł26.6m in cash, leading to a zł3.68m net cash position.
How Healthy Is ATM Grupa's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that ATM Grupa had liabilities of zł61.1m due within 12 months and liabilities of zł37.4m due beyond that. Offsetting this, it had zł26.6m in cash and zł63.6m in receivables that were due within 12 months. So it has liabilities totalling zł8.33m more than its cash and near-term receivables, combined.
Since publicly traded ATM Grupa shares are worth a total of zł339.7m, 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, ATM Grupa also has more cash than debt, so we're pretty confident it can manage its debt safely.
In fact ATM Grupa's saving grace is its low debt levels, because its EBIT has tanked 61% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is ATM Grupa's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ATM Grupa has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, ATM Grupa's free cash flow amounted to 20% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing up
We could understand if investors are concerned about ATM Grupa's liabilities, but we can be reassured by the fact it has has net cash of zł3.68m. So we are not troubled with ATM Grupa's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for ATM Grupa you should know about.
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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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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About WSE:ATG
ATM Grupa
Operates as a television and film production company in Poland, Europe, North America, Asia, and Australia.
Flawless balance sheet second-rate dividend payer.
