Vista Alegre Atlantis SGPS (ELI:VAF) Has No Shortage Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Vista Alegre Atlantis, SGPS, S.A. (ELI:VAF) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Vista Alegre Atlantis SGPS

What Is Vista Alegre Atlantis SGPS's Net Debt?

As you can see below, Vista Alegre Atlantis SGPS had €98.9m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had €7.37m in cash, and so its net debt is €91.6m.

How Healthy Is Vista Alegre Atlantis SGPS' Balance Sheet?

According to the last reported balance sheet, Vista Alegre Atlantis SGPS had liabilities of €68.5m due within 12 months, and liabilities of €98.7m due beyond 12 months. On the other hand, it had cash of €7.37m and €21.2m worth of receivables due within a year. So it has liabilities totalling €138.6m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €149.2m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.98 times and a disturbingly high net debt to EBITDA ratio of 7.2 hit our confidence in Vista Alegre Atlantis SGPS like a one-two punch to the gut. The debt burden here is substantial. Worse, Vista Alegre Atlantis SGPS's EBIT was down 61% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Vista Alegre Atlantis SGPS burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Vista Alegre Atlantis SGPS's conversion of EBIT to free cash flow and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. And even its net debt to EBITDA fails to inspire much confidence. Taking into account all the aforementioned factors, it looks like Vista Alegre Atlantis SGPS has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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. We've identified 3 warning signs with Vista Alegre Atlantis SGPS (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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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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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