Is Kapsch TrafficCom (VIE:KTCG) A Risky Investment?

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.' 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, Kapsch TrafficCom AG (VIE:KTCG) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Kapsch TrafficCom

How Much Debt Does Kapsch TrafficCom Carry?

As you can see below, Kapsch TrafficCom had €108.2m of debt at September 2024, down from €145.7m a year prior. However, because it has a cash reserve of €30.7m, its net debt is less, at about €77.5m.

A Look At Kapsch TrafficCom's Liabilities

According to the last reported balance sheet, Kapsch TrafficCom had liabilities of €204.1m due within 12 months, and liabilities of €132.2m due beyond 12 months. On the other hand, it had cash of €30.7m and €213.3m worth of receivables due within a year. So it has liabilities totalling €92.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €96.1m, so it does suggest shareholders should keep an eye on Kapsch TrafficCom's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Kapsch TrafficCom's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Kapsch TrafficCom saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Kapsch TrafficCom had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €7.3m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of €34m into a profit. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Kapsch TrafficCom .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.