Charlie Munger-backed external fund manager of Berkshire Hathaway, Li Lu, doesn’t give a damn when he says, “The biggest investment risk is not price volatility, but if you suffer a permanent loss of capital.” When we think about how risky a company is, we always like to look at its debt utilization, as debt overload can lead to ruin. It is important to point out that Amper, SA (BME: AMP) brings debt. But should shareholders be concerned about the use of debt?
When is debt dangerous?
Debt and other liabilities become risky for a company when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thereby permanently diluting shareholders. That said, the most common situation is where a company manages its debt reasonably well and for its own benefit. When we look at debt levels, we first consider the liquidity and debt levels, together.
View our latest analysis for Amper
What is Amper’s debt?
As you can see below, at the end of December 2021, Amper had a debt of 94.2 million euros, compared to 71.3 million euros a year ago. Click on the image for more details. However, he also had € 31.6 million in cash, so his net debt is € 62.6 million.
How healthy is Amper’s balance sheet?
By zooming in on the latest financial statement data, we can see that Amper had liabilities of 188.3 million euros maturing within 12 months and liabilities of 57.4 million euros maturing beyond. To compensate for this, it had € 31.6 million in cash and € 132.3 million in receivables due within 12 months. Thus its liabilities amount to € 81.8 million more than the combination of cash and short-term credit.
Amper has a market capitalization of € 209.5 million, so it could most likely raise cash to improve its balance sheet should the need arise. However, it’s still worth taking a close look at its ability to pay off debt.
We use two main ratios to inform us about debt levels versus earnings. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how many times your earnings before interest and taxes (EBIT) cover interest expense (or interest coverage , In short) . In this way, we consider both the absolute quantum of debt and the interest rates paid on it.
Amper’s debt is 2.6 times its EBITDA and its EBIT covers interest expense 2.9 times. Overall, this implies that while we would not like to see debt levels rise, we believe you can manage your current leverage. However, it should be comforting for shareholders to remember that Amper has actually increased its EBIT by a hefty 190% over the past 12 months. If he can continue down that path, he will be able to get rid of his debt with relative ease. There is no doubt that we learn more about debt from the budget. But you can’t see debt in total isolation; as Amper will need earnings to pay that debt. So when considering debt, earnings trends are definitely worth looking at. Click here for an interactive snapshot.
But our final consideration is also important, because a company cannot pay its debt with paper profits; he needs cold cash. So we always check how much of that EBIT is translated into free cash flow. Looking at the past three years, Amper has actually experienced a cash outflow, overall. Debt is usually more expensive and almost always riskier in the hands of a company with negative free cash flow. Shareholders should hope for an improvement.
Our point of view
Amper’s conversion of EBIT to free cash flow and interest hedging certainly weighed on it, in our opinion. But the good news is that it seems to be able to grow its EBIT with ease. Looking at all the angles mentioned above, it seems to us that Amper is a somewhat risky investment due to its debt. This is not necessarily a bad thing, since leverage can increase returns on equity, but it is something to be aware of. The budget is clearly the area to focus on when analyzing debt. However, not all investment risk lies within the balance sheet, far from it. For example, we have identified 4 warning signs for Amper (2 shouldn’t be ignored) that you should be aware of.
At the end of the day, it is often best to focus on net debt free companies. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell stock and does not take into account your goals or financial situation. Our goal is to provide you with a focused, long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price sensitive company announcements or quality material. Simply Wall St has no position in any of the stocks mentioned.