ATM Grupa (WSE:ATG) Seems To Use Debt Quite Sensibly

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 note that ATM Grupa S.A. (WSE:ATG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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.

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 zł17.4m at the end of March 2021, a reduction from zł28.4m over a year. But it also has zł36.6m in cash to offset that, meaning it has zł19.2m net cash.

How Strong Is ATM Grupa's Balance Sheet?

The latest balance sheet data shows that ATM Grupa had liabilities of zł41.0m due within a year, and liabilities of zł32.4m falling due after that. Offsetting these obligations, it had cash of zł36.6m as well as receivables valued at zł45.8m due within 12 months. So it actually has zł9.09m more liquid assets than total liabilities.

This surplus suggests that ATM Grupa has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ATM Grupa boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for ATM Grupa if management cannot prevent a repeat of the 32% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. ATM Grupa may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, ATM Grupa produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case ATM Grupa has zł19.2m in net cash and a decent-looking balance sheet. So we don't have any problem with ATM Grupa's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with ATM Grupa .

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. 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.
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