S.C. UAMT (BVB:UAM) Has A Somewhat Strained Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 S.C. UAMT S.A. (BVB:UAM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for S.C. UAMT

What Is S.C. UAMT's Net Debt?

The image below, which you can click on for greater detail, shows that S.C. UAMT had debt of RON14.4m at the end of December 2022, a reduction from RON23.7m over a year. However, it does have RON8.63m in cash offsetting this, leading to net debt of about RON5.82m.

A Look At S.C. UAMT's Liabilities

We can see from the most recent balance sheet that S.C. UAMT had liabilities of RON7.43m falling due within a year, and liabilities of RON20.0m due beyond that. Offsetting these obligations, it had cash of RON8.63m as well as receivables valued at RON13.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RON4.95m.

Of course, S.C. UAMT has a market capitalization of RON36.5m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

S.C. UAMT has a very low debt to EBITDA ratio of 0.94 so it is strange to see weak interest coverage, with last year's EBIT being only 0.98 times the interest expense. So one way or the other, it's clear the debt levels are not trivial. Notably, S.C. UAMT made a loss at the EBIT level, last year, but improved that to positive EBIT of RON883k in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since S.C. UAMT will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, S.C. UAMT saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Both S.C. UAMT's conversion of EBIT to free cash flow and its interest cover were discouraging. At least its net debt to EBITDA gives us reason to be optimistic. When we consider all the factors discussed, it seems to us that S.C. UAMT is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for S.C. UAMT that you should be aware of before investing here.

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.