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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that AKWEL (EPA:AKW) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. If things get really bad, the 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, thus permanently diluting shareholders. 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.
Check out our latest analysis for AKWEL
What Is AKWEL's Debt?
As you can see below, AKWEL had €133.3m of debt, at December 2018, which is about the same the year before. You can click the chart for greater detail. However, it also had €92.7m in cash, and so its net debt is €40.6m.
How Healthy Is AKWEL's Balance Sheet?
The latest balance sheet data shows that AKWEL had liabilities of €251.0m due within a year, and liabilities of €101.9m falling due after that. Offsetting these obligations, it had cash of €92.7m as well as receivables valued at €228.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €31.4m.
Of course, AKWEL has a market capitalization of €446.0m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
AKWEL has a low net debt to EBITDA ratio of only 0.37. And its EBIT easily covers its interest expense, being 35.5 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In fact AKWEL's saving grace is its low debt levels, because its EBIT has tanked 33% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine AKWEL's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.