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Health Check: How Prudently Does Alpha MOS (EPA:ALM) Use Debt?

Simply Wall St

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. As with many other companies Alpha MOS S.A. (EPA:ALM) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for Alpha MOS

What Is Alpha MOS's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Alpha MOS had €1.24m of debt in December 2018, down from €1.31m, one year before. However, its balance sheet shows it holds €2.51m in cash, so it actually has €1.26m net cash.

ENXTPA:ALM Historical Debt, August 31st 2019

A Look At Alpha MOS's Liabilities

According to the last reported balance sheet, Alpha MOS had liabilities of €1.46m due within 12 months, and liabilities of €2.28m due beyond 12 months. Offsetting this, it had €2.51m in cash and €1.54m in receivables that were due within 12 months. So it can boast €309.0k more liquid assets than total liabilities.

This state of affairs indicates that Alpha MOS's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €29.7m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Alpha MOS boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Alpha MOS 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.

In the last year Alpha MOS actually shrunk its revenue by 8.7%, to €4.5m. That's not what we would hope to see.

So How Risky Is Alpha MOS?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Alpha MOS lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €5.1m of cash and made a loss of €5.4m. With only €2.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 Alpha MOS's profit, revenue, and operating cashflow have changed over the last few years.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.