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.' 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 Allgemeine Gold- und Silberscheideanstalt AG (MUN:AGS) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Allgemeine Gold- und Silberscheideanstalt's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 Allgemeine Gold- und Silberscheideanstalt had €12.0k of debt, an increase on none, over one year. But on the other hand it also has €2.78m in cash, leading to a €2.77m net cash position.
A Look At Allgemeine Gold- und Silberscheideanstalt's Liabilities
Zooming in on the latest balance sheet data, we can see that Allgemeine Gold- und Silberscheideanstalt had liabilities of €14.1m due within 12 months and liabilities of €22.1m due beyond that. Offsetting these obligations, it had cash of €2.78m as well as receivables valued at €55.2m due within 12 months. So it can boast €21.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Allgemeine Gold- und Silberscheideanstalt could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Allgemeine Gold- und Silberscheideanstalt boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Allgemeine Gold- und Silberscheideanstalt 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 Allgemeine Gold- und Silberscheideanstalt actually shrunk its revenue by 8.4%, to €779m. We would much prefer see growth.
So How Risky Is Allgemeine Gold- und Silberscheideanstalt?
Although Allgemeine Gold- und Silberscheideanstalt had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of €17m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. For riskier companies like Allgemeine Gold- und Silberscheideanstalt I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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