Is Centric Holdings (ATH:CENTR) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘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. We can see that Centric Holdings S.A. (ATH:CENTR) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Centric Holdings

How Much Debt Does Centric Holdings Carry?

As you can see below, at the end of June 2019, Centric Holdings had €2.55m of debt, up from €2.01m a year ago. Click the image for more detail. However, it does have €13.6m in cash offsetting this, leading to net cash of €11.0m.

ATSE:CENTR Historical Debt, March 9th 2020
ATSE:CENTR Historical Debt, March 9th 2020

How Healthy Is Centric Holdings’s Balance Sheet?

The latest balance sheet data shows that Centric Holdings had liabilities of €5.31m due within a year, and liabilities of €3.84m falling due after that. Offsetting this, it had €13.6m in cash and €3.94m in receivables that were due within 12 months. So it can boast €8.37m more liquid assets than total liabilities.

This surplus liquidity suggests that Centric Holdings’s balance sheet could take a hit just as well as Homer Simpson’s head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Centric Holdings boasts net cash, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can’t view debt in total isolation; since Centric Holdings will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Centric Holdings reported revenue of €3.6m, which is a gain of 91%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Centric Holdings?

While Centric Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €5.5m. So although it is loss-making, it doesn’t seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 91% is a good sign. There’s no doubt fast top line growth can cure all manner of ills, for a stock. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. To that end, you should learn about the 4 warning signs we’ve spotted with Centric Holdings (including 1 which is shouldn’t be ignored) .

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.

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.

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