The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. As with many other companies AST Groupe (EPA:ASP) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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, 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 AST Groupe
How Much Debt Does AST Groupe Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 AST Groupe had €31.3m of debt, an increase on €22.5m, over one year. However, its balance sheet shows it holds €34.2m in cash, so it actually has €2.85m net cash.
How Strong Is AST Groupe's Balance Sheet?
According to the last reported balance sheet, AST Groupe had liabilities of €83.9m due within 12 months, and liabilities of €22.1m due beyond 12 months. Offsetting these obligations, it had cash of €34.2m as well as receivables valued at €39.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €32.7m.
This is a mountain of leverage relative to its market capitalization of €47.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, AST Groupe also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, AST Groupe grew its EBIT by 57% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if AST Groupe 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.