In This Article:
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Artea SA (EPA:ARTE) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Artea
How Much Debt Does Artea Carry?
As you can see below, Artea had €114.3m of debt at December 2018, down from €135.4m a year prior. On the flip side, it has €17.4m in cash leading to net debt of about €96.9m.
A Look At Artea's Liabilities
We can see from the most recent balance sheet that Artea had liabilities of €50.9m falling due within a year, and liabilities of €123.4m due beyond that. On the other hand, it had cash of €17.4m and €30.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €126.1m.
This deficit casts a shadow over the €59.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt After all, Artea would likely require a major re-capitalisation if it had to pay its creditors today.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). 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).
Artea has a rather high debt to EBITDA ratio of 5.9 which suggests a meaningful debt load. However, its interest coverage of 3.8 is reasonably strong, which is a good sign. However, it should be some comfort for shareholders to recall that Artea actually grew its EBIT by a hefty 180%, over the last 12 months. If that earnings trend continues it will make its debt load much more manageable in the future. 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 Artea 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.