Is Crealogix Holding (VTX:CLXN) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Crealogix Holding AG (VTX:CLXN) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Crealogix Holding

What Is Crealogix Holding's Debt?

As you can see below, at the end of June 2022, Crealogix Holding had CHF25.4m of debt, up from CHF24.2m a year ago. Click the image for more detail. On the flip side, it has CHF14.1m in cash leading to net debt of about CHF11.4m.

How Healthy Is Crealogix Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Crealogix Holding had liabilities of CHF50.1m due within 12 months and liabilities of CHF26.2m due beyond that. Offsetting these obligations, it had cash of CHF14.1m as well as receivables valued at CHF16.3m due within 12 months. So it has liabilities totalling CHF45.8m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CHF70.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Crealogix Holding'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, Crealogix Holding made a loss at the EBIT level, and saw its revenue drop to CHF96m, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

Not only did Crealogix Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CHF16m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CHF22m of cash over the last year. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Crealogix Holding (of which 1 is significant!) you should know about.

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.