Is Atende (WSE:ATD) Using Too Much Debt?

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.' 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 Atende S.A. (WSE:ATD) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Atende

What Is Atende's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Atende had zł18.3m of debt, an increase on zł14.6m, over one year. But it also has zł59.4m in cash to offset that, meaning it has zł41.1m net cash.

A Look At Atende's Liabilities

According to the last reported balance sheet, Atende had liabilities of zł66.7m due within 12 months, and liabilities of zł26.3m due beyond 12 months. On the other hand, it had cash of zł59.4m and zł53.9m worth of receivables due within a year. So it can boast zł20.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Atende could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Atende boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Atende grew its EBIT by 69% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Atende's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Atende 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 last three years, Atende recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Atende has net cash of zł41.1m, as well as more liquid assets than liabilities. And we liked the look of last year's 69% year-on-year EBIT growth. So we don't have any problem with Atende's use of debt. 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 instance, we've identified 3 warning signs for Atende (1 is a bit unpleasant) you should be aware of.

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.

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