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.' 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?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.
What Is Crealogix Holding's Debt?
The chart below, which you can click on for greater detail, shows that Crealogix Holding had CHF24.5m in debt in December 2020; about the same as the year before. But on the other hand it also has CHF30.1m in cash, leading to a CHF5.59m net cash position.
How Healthy Is Crealogix Holding's Balance Sheet?
According to the last reported balance sheet, Crealogix Holding had liabilities of CHF41.5m due within 12 months, and liabilities of CHF27.3m due beyond 12 months. On the other hand, it had cash of CHF30.1m and CHF21.9m worth of receivables due within a year. So it has liabilities totalling CHF16.7m more than its cash and near-term receivables, combined.
Given Crealogix Holding has a market capitalization of CHF159.6m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Crealogix Holding also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Crealogix Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Crealogix Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 8.1%, to CHF108m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Crealogix Holding?
Although Crealogix Holding had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CHF502k. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Crealogix Holding , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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