Atos (EPA:ATO) has debt but no profit; Should you be worried?

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the 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. Like many other companies Atos SE (EPA:ATO) uses debt. But should shareholders worry about its use of debt?

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Discover our latest analysis for Atos

What is Atos debt?

As you can see below, at the end of June 2022, Atos had 5.26 billion euros in debt, compared to 3.61 billion euros a year ago. Click on the image for more details. However, he has €3.46 billion in cash that offsets this, resulting in a net debt of around €1.79 billion.

How strong is Atos’ balance sheet?

Zooming in on the latest balance sheet data, we can see that Atos had liabilities of €7.84 billion due within 12 months and liabilities of €4.88 billion due beyond. In compensation for these obligations, it had cash of 3.46 billion euros as well as receivables worth 3.50 billion euros at less than 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €5.76 billion.

The deficiency here weighs heavily on the 1.15 billion euro business itself, like a child struggling under the weight of a huge backpack full of books, his gym gear and a trumpet. So we definitely think shareholders need to watch this one closely. Ultimately, Atos would likely need a major recapitalization if its creditors were to demand repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Atos’ 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.

Over the last year, Atos’ revenue was rather stable and it achieved a negative EBIT. While that’s hardly impressive, it’s not too bad either.

Caveat Emptor

It is important to note that Atos recorded a loss of earnings before interest and taxes (EBIT) over the last year. Indeed, it lost €13 million in EBIT. Combining this information with the significant liabilities we have already discussed makes us very hesitant about this stock, to say the least. Of course, he may be able to improve his situation with a bit of luck and good execution. However, we would not bet on it given that he has vaporized €90m in cash over the last twelve months, and that he does not have a lot of liquidities. We therefore consider this to be a high-risk action and would not be at all surprised if the company were to ask shareholders for money before long. 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 – Atos has 1 warning sign we think you should know.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

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.