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Is Sidetrade (EPA:ALBFR) Using Too Much Debt?

Simply Wall St

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Sidetrade SA (EPA:ALBFR) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Sidetrade

What Is Sidetrade's Net Debt?

As you can see below, Sidetrade had €393.2k of debt at December 2018, down from €423.2k a year prior. However, it does have €4.04m in cash offsetting this, leading to net cash of €3.65m.

ENXTPA:ALBFR Historical Debt, October 12th 2019

How Healthy Is Sidetrade's Balance Sheet?

We can see from the most recent balance sheet that Sidetrade had liabilities of €11.2m falling due within a year, and liabilities of €6.15m due beyond that. Offsetting these obligations, it had cash of €4.04m as well as receivables valued at €14.1m due within 12 months. So it can boast €774.8k more liquid assets than total liabilities.

This state of affairs indicates that Sidetrade's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €87.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Sidetrade boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sidetrade can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Sidetrade had negative earnings before interest and tax, and actually shrunk its revenue by 59%, to €9.6m. To be frank that doesn't bode well.

So How Risky Is Sidetrade?

While Sidetrade lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of €846k. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like Sidetrade I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.