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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Autoneum Holding AG (VTX:AUTN) makes use of debt. 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Autoneum Holding Carry?
The image below, which you can click on for greater detail, shows that at June 2019 Autoneum Holding had debt of CHF724.3m, up from CHF333.5m in one year. However, it also had CHF56.8m in cash, and so its net debt is CHF667.5m.
A Look At Autoneum Holding's Liabilities
Zooming in on the latest balance sheet data, we can see that Autoneum Holding had liabilities of CHF643.3m due within 12 months and liabilities of CHF722.3m due beyond that. Offsetting this, it had CHF56.8m in cash and CHF332.7m in receivables that were due within 12 months. So its liabilities total CHF976.1m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the CHF488.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt After all, Autoneum Holding would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Autoneum Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Autoneum Holding saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
Importantly, Autoneum Holding had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at CHF4.1m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CHF74m over the last twelve months. That means it's on the risky side of things. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Autoneum Holding's profit, revenue, and operating cashflow have changed over the last few years.
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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