Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
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.’ 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. ATM Grupa S.A. (WSE:ATG) makes use of debt. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
How Much Debt Does ATM Grupa Carry?
The image below, which you can click on for greater detail, shows that at March 2019 ATM Grupa had debt of zł37.2m, up from zł25.9m in one year. But it also has zł41.0m in cash to offset that, meaning it has zł3.79m net cash.
A Look At ATM Grupa’s Liabilities
According to the last reported balance sheet, ATM Grupa had liabilities of zł54.9m due within 12 months, and liabilities of zł49.2m due beyond 12 months. Offsetting these obligations, it had cash of zł41.0m as well as receivables valued at zł55.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł7.51m.
Given ATM Grupa has a market capitalization of zł367.1m, it’s hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. ATM Grupa boasts net cash, so it’s fair to say it does not have a heavy debt load!
But the bad news is that ATM Grupa has seen its EBIT plunge 14% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the most recent three years, ATM Grupa recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
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 zł3.8m. So we are not troubled with ATM Grupa’s debt use. Given ATM Grupa has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.