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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Altri, S.G.P.S., S.A. (ELI:ALTR) does use debt in its business. But should shareholders be worried about its use of debt?
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Altri S.G.P.S
How Much Debt Does Altri S.G.P.S Carry?
As you can see below, Altri S.G.P.S had €724.1m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have €204.0m in cash offsetting this, leading to net debt of about €520.1m.
A Look At Altri S.G.P.S's Liabilities
We can see from the most recent balance sheet that Altri S.G.P.S had liabilities of €408.8m falling due within a year, and liabilities of €680.2m due beyond that. On the other hand, it had cash of €204.0m and €116.4m worth of receivables due within a year. So it has liabilities totalling €768.6m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of €1.13b. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).