Klingelnberg (VTX:KLIN) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Klingelnberg AG (VTX:KLIN) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Klingelnberg

What Is Klingelnberg's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Klingelnberg had €37.5m of debt, an increase on €19.0m, over one year. However, its balance sheet shows it holds €41.2m in cash, so it actually has €3.62m net cash.

A Look At Klingelnberg's Liabilities

Zooming in on the latest balance sheet data, we can see that Klingelnberg had liabilities of €92.7m due within 12 months and liabilities of €20.1m due beyond that. Offsetting these obligations, it had cash of €41.2m as well as receivables valued at €40.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €31.4m.

Of course, Klingelnberg has a market capitalization of €171.4m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Klingelnberg 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 it is future earnings, more than anything, that will determine Klingelnberg'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 Klingelnberg had a loss before interest and tax, and actually shrunk its revenue by 31%, to €185m. That makes us nervous, to say the least.

So How Risky Is Klingelnberg?

While Klingelnberg lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €11m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Klingelnberg you should be aware of.

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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