Is Kerlink (EPA:ALKLK) Using Debt In A Risky Way?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Kerlink SA (EPA:ALKLK) does carry debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Kerlink
How Much Debt Does Kerlink Carry?
As you can see below, at the end of June 2019, Kerlink had €5.03m of debt, up from €4.03m a year ago. Click the image for more detail. But on the other hand it also has €8.28m in cash, leading to a €3.25m net cash position.
How Healthy Is Kerlink's Balance Sheet?
We can see from the most recent balance sheet that Kerlink had liabilities of €9.13m falling due within a year, and liabilities of €4.12m due beyond that. On the other hand, it had cash of €8.28m and €5.26m worth of receivables due within a year. So it actually has €293.0k more liquid assets than total liabilities.
This state of affairs indicates that Kerlink's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €23.8m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Kerlink has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kerlink's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Kerlink made a loss at the EBIT level, and saw its revenue drop to €15m, which is a fall of 35%. That makes us nervous, to say the least.
So How Risky Is Kerlink?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Kerlink lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €5.4m of cash and made a loss of €9.3m. However, it has net cash of €3.25m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 Kerlink'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.
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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.
