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 note that Antevenio, S.A. (EPA:ALANT) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Antevenio
What Is Antevenio's Net Debt?
As you can see below, Antevenio had €263.1k of debt at December 2018, down from €372.5k a year prior. However, it does have €5.61m in cash offsetting this, leading to net cash of €5.35m.
A Look At Antevenio's Liabilities
According to the last reported balance sheet, Antevenio had liabilities of €8.74m due within 12 months, and liabilities of €2.86m due beyond 12 months. Offsetting this, it had €5.61m in cash and €9.29m in receivables that were due within 12 months. So it actually has €3.29m more liquid assets than total liabilities.
This short term liquidity is a sign that Antevenio could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Antevenio boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Antevenio grew its EBIT by 5.1% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Antevenio's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Antevenio may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Antevenio produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.