Does Applus Services (BME: APPS) have a healthy track record?

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. Above all, Applus Services, SA (BME: APPS) is in debt. But should shareholders be concerned about its use of debt?

When is Debt a Problem?

Debts and other liabilities become risky for a business when it cannot easily meet these 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 costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

See our latest review for Applus Services

How much debt do Applus services carry?

As you can see below, Applus Services had 734.6 million euros in debt, as of June 2021, which is roughly the same as the year before. You can click on the graph for more details. However, he has 156.5 million euros in cash to make up for this, leading to net debt of around 578.1 million euros.

A look at the responsibilities of Applus Services

According to the latest published balance sheet, Applus Services had a liability of € 500.00 million within 12 months and a liability of € 1.07 billion due beyond 12 months. On the other hand, it had cash of € 156.5 million and € 380.7 million in receivables within one year. Its liabilities are therefore 1.03 billion euros more than the combination of its cash and short-term receivables.

This deficit is substantial compared to its market capitalization of 1.09 billion euros, so he suggests shareholders keep an eye on Applus Services’ use of debt. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.

We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Applus Services’ net debt to EBITDA ratio of around 1.6 suggests moderate use of debt. And its imposing EBIT of 13.9 times its interest costs, means the debt load is as light as a peacock feather. Even more impressively, Applus Services increased its EBIT by 306% year over year. This boost will make it even easier to pay down debt in the future. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Applus Services can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Fortunately for all shareholders, Applus Services has actually generated more free cash flow than EBIT over the past three years. There is nothing better than cash flow to stay in the good favor of your lenders.

Our point of view

The good news is that Applus Services’ demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a little concerned with its total liability level. Considering all of this data, it seems to us that Applus Services is taking a pretty sane approach to debt. This means that they are taking a bit more risk, in the hope of increasing shareholder returns. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 3 warning signs with Applus Services, and understanding them should be part of your investment process.

At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock 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.