Is Kapsch TrafficCom (VIE:KTCG) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Kapsch TrafficCom AG (VIE:KTCG) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that KTCG is potentially undervalued!

How Much Debt Does Kapsch TrafficCom Carry?

The image below, which you can click on for greater detail, shows that Kapsch TrafficCom had debt of €109.3m at the end of June 2022, a reduction from €228.0m over a year. However, it also had €61.3m in cash, and so its net debt is €48.0m.

How Healthy Is Kapsch TrafficCom's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kapsch TrafficCom had liabilities of €317.9m due within 12 months and liabilities of €109.4m due beyond that. On the other hand, it had cash of €61.3m and €219.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €146.3m.

This deficit is considerable relative to its market capitalization of €167.4m, so it does suggest shareholders should keep an eye on Kapsch TrafficCom's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Kapsch TrafficCom wasn't profitable at an EBIT level, but managed to grow its revenue by 6.1%, to €524m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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 €4.0m. 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. For example, we would not want to see a repeat of last year's loss of €14m. So in short it's a really risky stock. For riskier companies like Kapsch TrafficCom 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.