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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Ahlers AG (FRA:AAH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company 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.
What Is Ahlers's Debt?
The image below, which you can click on for greater detail, shows that Ahlers had debt of €33.5m at the end of May 2019, a reduction from €42.7m over a year. On the flip side, it has €4.68m in cash leading to net debt of about €28.8m.
How Strong Is Ahlers's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Ahlers had liabilities of €45.4m due within 12 months and liabilities of €21.7m due beyond that. Offsetting these obligations, it had cash of €4.68m as well as receivables valued at €16.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €46.1m.
When you consider that this deficiency exceeds the company's €32.0m market capitalization, you might well be inclined to review the balance sheet, just like one might study a new partner's social media. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ahlers 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.
Over 12 months, Ahlers saw its revenue drop to €218m, which is a fall of 5.3%. That's not what we would hope to see.
Importantly, Ahlers had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable €10m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of-€8.3m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Ahlers's profit, revenue, and operating cashflow have changed over the last few years.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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