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Here's Why De Raj Group (ETR:DRJ) Can Afford Some Debt

Simply Wall St

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies De Raj Group AG (ETR:DRJ) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for De Raj Group

What Is De Raj Group's Debt?

The image below, which you can click on for greater detail, shows that De Raj Group had debt of €18.9m at the end of June 2019, a reduction from €21.6m over a year. And it doesn't have much cash, so its net debt is about the same.

XTRA:DRJ Historical Debt, October 20th 2019

A Look At De Raj Group's Liabilities

According to the last reported balance sheet, De Raj Group had liabilities of €11.3m due within 12 months, and liabilities of €13.2m due beyond 12 months. Offsetting these obligations, it had cash of €219.2k as well as receivables valued at €6.21m due within 12 months. So its liabilities total €18.0m more than the combination of its cash and short-term receivables.

Since publicly traded De Raj Group shares are worth a total of €93.1m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is De Raj Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, De Raj Group made a loss at the EBIT level, and saw its revenue drop to €9.2m, which is a fall of 26%. To be frank that doesn't bode well.

Caveat Emptor

Not only did De Raj Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost €568k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of €1.5m into a profit. So we do think this stock is quite risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how De Raj Group's profit, revenue, and operating cashflow have changed over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.