Does Aurubis (ETR: NDA) have a healthy track record?

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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We notice that Aurubis SA (ETR: NDA) has debt on its balance sheet. But the most important question is: what risk does this debt create?

Why Does Debt Bring Risk?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. 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 think of a business’s use of debt, we first look at cash flow and debt together.

Discover our latest analysis for Aurubis

What is Aurubis’ debt?

The image below, which you can click for more details, shows that in March 2021 Aurubis had a debt of 510.0 million euros, compared to 110.8 million euros in one year. But he also has € 545.0 million in cash to make up for that, which means he has € 35.0 million in net cash.

XTRA debt history: NDA on equity July 2, 2021

How strong is Aurubis’ balance sheet?

The latest balance sheet data shows that Aurubis had debts of € 2.00 billion maturing within one year and debts of € 1.16 billion maturing thereafter. On the other hand, it had cash of € 545.0 million and € 601.4 million in receivables within one year. It therefore has total liabilities of 2.01 billion euros more than its combined cash and short-term receivables.

This deficit is not that bad as Aurubis is worth 3.41 billion euros, and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look whether it can manage its debt without dilution. While he has some liabilities to note, Aurubis also has more cash than debt, so we’re pretty confident he can handle his debt safely.

Even more impressive, Aurubis increased its EBIT by 554% year over year. If sustained, this growth will make debt even more manageable in the years to come. 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 Aurubis 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.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. Aurubis may have net cash on the balance sheet, but it is always interesting to see the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Aurubis has recorded free cash flow corresponding to 53% of its EBIT, which is close to normal, given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.

In summary

Although Aurubis’ balance sheet is not particularly strong, due to total liabilities it is clearly positive to see that it has net cash of € 35.0m. And it impressed us with its EBIT growth of 554% over last year. We therefore have no problem with the use of debt by Aurubis. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 1 warning sign for Aurubis which you should know before investing here.

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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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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