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. We note that 11880 Solutions AG (ETR:TGT) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for 11880 Solutions
What Is 11880 Solutions's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2023 11880 Solutions had €2.19m of debt, an increase on €1.38m, over one year. However, because it has a cash reserve of €1.08m, its net debt is less, at about €1.11m.
How Healthy Is 11880 Solutions' Balance Sheet?
We can see from the most recent balance sheet that 11880 Solutions had liabilities of €12.7m falling due within a year, and liabilities of €5.72m due beyond that. Offsetting these obligations, it had cash of €1.08m as well as receivables valued at €5.70m due within 12 months. So it has liabilities totalling €11.7m more than its cash and near-term receivables, combined.
11880 Solutions has a market capitalization of €19.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since 11880 Solutions will need earnings to service that debt. 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.
Over 12 months, 11880 Solutions reported revenue of €57m, which is a gain of 5.1%, although it did not report any earnings before interest and tax. 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. Its EBIT loss was a whopping €3.2m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 €3.5m. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for 11880 Solutions 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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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.
About XTRA:TGT
11880 Solutions
Offers telephone directory assistance services to private and business customers in Germany.
Good value with adequate balance sheet.