Ahlers (FRA:AAH) has debt but no income; Should you be worried?

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Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Ahlers SA (FRA:AAH) has a debt on its balance sheet. But does this debt worry shareholders?

Why is debt risky?

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. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. 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 look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for Ahlers

What is the Ahlers debt?

You can click on the graph below for historical figures, but it shows Ahlers had €32.1m in debt in May 2022, up from €38.8m a year earlier. However, he also had €5.23 million in cash, so his net debt is €26.9 million.

DB:AAH Debt to Equity September 10, 2022

How strong is Ahlers’ balance sheet?

According to the last published balance sheet, Ahlers had liabilities of 34.9 million euros maturing within 12 months and liabilities of 33.6 million euros maturing beyond 12 months. On the other hand, it has cash of €5.23 million and €18.1 million in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €45.0 million.

The deficiency here weighs heavily on the 14.4 million euro enterprise itself, like a child struggling under the weight of a huge backpack full of books, his sports equipment and a trumpet. We would therefore be watching his balance sheet closely, no doubt. Ultimately, Ahlers would likely need a major recapitalization if his creditors were to demand repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Ahlers 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.

Over 12 months, Ahlers posted revenue of 163 million euros, a gain of 17%, although it reported no earnings before interest and tax. We generally like to see faster growth from unprofitable businesses, but each in its own way.

Caveat Emptor

Importantly, Ahlers posted a loss in earnings before interest and taxes (EBIT) over the past year. Indeed, it lost a very considerable 9.9 million euros in terms of EBIT. Considering the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will change course. But we think that’s unlikely as he lacks liquid assets and posted a loss of €11m last year. So while it’s not wise to assume the business will fail, we think it’s risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we found 2 warning signs for Ahlers which you should be aware of before investing here.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

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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