Does Vista Alegre Atlantis SGPS (ELI:VAF) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Vista Alegre Atlantis, SGPS, S.A. (ELI:VAF) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Vista Alegre Atlantis SGPS

How Much Debt Does Vista Alegre Atlantis SGPS Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Vista Alegre Atlantis SGPS had €98.7m of debt, an increase on €90.4m, over one year. On the flip side, it has €10.5m in cash leading to net debt of about €88.2m.

A Look At Vista Alegre Atlantis SGPS' Liabilities

According to the last reported balance sheet, Vista Alegre Atlantis SGPS had liabilities of €58.1m due within 12 months, and liabilities of €102.0m due beyond 12 months. On the other hand, it had cash of €10.5m and €12.2m worth of receivables due within a year. So it has liabilities totalling €137.5m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €159.3m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Vista Alegre Atlantis SGPS'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.

In the last year Vista Alegre Atlantis SGPS had a loss before interest and tax, and actually shrunk its revenue by 7.9%, to €105m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Vista Alegre Atlantis SGPS produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €3.9m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of €4.1m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Vista Alegre Atlantis SGPS that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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