Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Arcure S.A. (EPA:ALCUR) has debt on its balance sheet. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest review for Arcure
What is Arcure’s debt?
The image below, which you can click on for more details, shows that Arcure had debt of €5.49m at the end of December 2021, down from €5.98m year-on-year. However, he also had €1.81 million in cash, so his net debt is €3.68 million.
How healthy is Arcure’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Arcure had liabilities of €5.24 million due within 12 months and liabilities of €4.98 million due beyond. In return, it had €1.81 million in cash and €5.28 million in receivables due within 12 months. Its liabilities therefore total €3.13 million more than the combination of its cash and short-term receivables.
Of course, Arcure has a market capitalization of 19.6 million, so those liabilities are probably manageable. That said, it is clear that we must continue to monitor its record, lest it deteriorate. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Arcure can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Last year, Arcure was not profitable in terms of EBIT, but managed to increase its turnover by 26%, to 12 million euros. The shareholders probably have their fingers crossed that she can make a profit.
Caveat Emptor
Despite the revenue growth, Arcure still posted a loss in earnings before interest and taxes (EBIT) over the past year. Its EBIT loss amounted to 2.2 million euros. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. So we think its balance sheet is a little stretched, but not beyond repair. However, it doesn’t help that he’s burned €3.6m in cash in the past year. In short, it’s a really risky title. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 3 warning signs for Arcure you should be aware.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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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 unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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