Is 11880 Solutions (ETR:TGT) 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. We note that 11880 Solutions AG (ETR:TGT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for 11880 Solutions

How Much Debt Does 11880 Solutions Carry?

The image below, which you can click on for greater detail, shows that at September 2023 11880 Solutions had debt of €2.19m, up from €1.33m in one year. On the flip side, it has €1.26m in cash leading to net debt of about €927.0k.

How Healthy Is 11880 Solutions' Balance Sheet?

According to the last reported balance sheet, 11880 Solutions had liabilities of €12.4m due within 12 months, and liabilities of €5.54m due beyond 12 months. Offsetting these obligations, it had cash of €1.26m as well as receivables valued at €5.84m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €10.8m.

This is a mountain of leverage relative to its market capitalization of €17.2m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is 11880 Solutions's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year 11880 Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 5.5%, to €57m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, 11880 Solutions had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable €3.0m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of €3.4m. So in short it's a really risky stock. 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. We've identified 1 warning sign with 11880 Solutions , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.