Would Invexans (SNSE:INVEXANS) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Invexans S.A. (SNSE:INVEXANS) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, 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.

View our latest analysis for Invexans

What Is Invexans's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Invexans had US$479.5m of debt, an increase on US$10.1m, over one year. However, it does have US$162.4m in cash offsetting this, leading to net debt of about US$317.2m.

How Healthy Is Invexans's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Invexans had liabilities of US$377.6m due within 12 months and liabilities of US$625.0m due beyond that. Offsetting this, it had US$162.4m in cash and US$156.5m in receivables that were due within 12 months. So its liabilities total US$683.6m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$1.05b, so it does suggest shareholders should keep an eye on Invexans's use of debt. 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 you can't view debt in total isolation; since Invexans will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Invexans wasn't profitable at an EBIT level, but managed to grow its revenue by 1,288,536%, to US$1.1b. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Invexans still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$15m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of US$47m into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Invexans is showing 2 warning signs in our investment analysis , you should know about...

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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