Kapsch TrafficCom (VIE:KTCG) Is Making Moderate Use Of Debt

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.' 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. We can see that Kapsch TrafficCom AG (VIE:KTCG) does use debt in its business. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kapsch TrafficCom

What Is Kapsch TrafficCom's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Kapsch TrafficCom had debt of €232.3m, up from €202.4m in one year. However, it also had €84.3m in cash, and so its net debt is €148.0m.

A Look At Kapsch TrafficCom's Liabilities

Zooming in on the latest balance sheet data, we can see that Kapsch TrafficCom had liabilities of €277.6m due within 12 months and liabilities of €221.7m due beyond that. Offsetting these obligations, it had cash of €84.3m as well as receivables valued at €259.6m due within 12 months. So it has liabilities totalling €155.5m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €206.7m. 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.

Over 12 months, Kapsch TrafficCom made a loss at the EBIT level, and saw its revenue drop to €629m, which is a fall of 17%. We would much prefer see growth.

Caveat Emptor

While Kapsch TrafficCom's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping €47m. 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. Another cause for caution is that is bled €2.2m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Kapsch TrafficCom (1 shouldn't be ignored) you should be aware of.

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. 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.
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