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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that SC UAMT SA (BVB:UAM) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for SC UAMT
What Is SC UAMT's Net Debt?
The image below, which you can click on for greater detail, shows that SC UAMT had debt of RON37.9m at the end of September 2020, a reduction from RON41.1m over a year. However, it also had RON24.1m in cash, and so its net debt is RON13.8m.
A Look At SC UAMT's Liabilities
According to the last reported balance sheet, SC UAMT had liabilities of RON60.4m due within 12 months, and liabilities of RON13.3m due beyond 12 months. Offsetting these obligations, it had cash of RON24.1m as well as receivables valued at RON23.4m due within 12 months. So its liabilities total RON26.2m more than the combination of its cash and short-term receivables.
SC UAMT has a market capitalization of RON77.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 SC UAMT will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year SC UAMT had a loss before interest and tax, and actually shrunk its revenue by 45%, to RON89m. That makes us nervous, to say the least.
Caveat Emptor
Not only did SC UAMT's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RON3.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 RON7.9m. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - SC UAMT has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.
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. 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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About BVB:UAM
S.C. UAMT
Manufactures and sells other parts and accessories for motor vehicles and motor vehicle engines in Europe.
Adequate balance sheet low.
