Here’s why Amper (BME: AMP) has a heavy debt burden
Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Mostly, Amper, SA (BME: AMP) is in debt. But does this debt worry shareholders?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
See our latest review for Amper
What is Amper’s debt?
The image below, which you can click for more details, shows that in March 2021, Amper had a debt of 69.9 million euros, up from 16.6 million euros in a year. On the other hand, it has 28.5 million euros in cash, leading to a net debt of around 41.3 million euros.
A look at Amper’s responsibilities
We can see from the most recent balance sheet that Amp had a liability of 123.9 million euros maturing within one year and a liability of 68.9 million euros beyond. On the other hand, it had cash of € 28.5 million and € 98.3 million in receivables within one year. Its liabilities therefore amount to € 66.0 million more than the combination of its cash and short-term receivables.
Amper has a market cap of 201.6 million euros, so she could most likely raise funds to improve her balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay your debt.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Amper shareholders are faced with the double whammy of a high net debt / EBITDA ratio (8.0) and relatively low interest coverage, since EBIT is only 0.064 times the expenses of interests. This means that we would consider him to be in heavy debt. Worse yet, Amper has seen their EBIT reach 99% over the past 12 months. If profits continue to follow this path, it will be more difficult to pay off this debt than to convince us to run a marathon in the rain. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Amper’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Amper has recorded free cash flow of 23% of its EBIT, which is lower than expected. It’s not great when it comes to paying down debt.
Our point of view
To be frank, Amper’s interest coverage and track record of (not) growing its EBIT makes us rather uncomfortable with its debt levels. But at least his total liability level isn’t that bad. Overall, it seems to us that Amper’s balance sheet is really very risky for the company. For this reason, we are quite cautious on the stock, and we believe that shareholders should closely monitor its liquidity. 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 off the balance sheet. To do this, you need to know the 1 warning sign we spotted with Amper.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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