Is CTS Eventim KGaA (ETR:EVD) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, CTS Eventim AG & Co. KGaA (ETR:EVD) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CTS Eventim KGaA

What Is CTS Eventim KGaA's Net Debt?

As you can see below, at the end of March 2021, CTS Eventim KGaA had €219.5m of debt, up from €74.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds €694.7m in cash, so it actually has €475.2m net cash.

A Look At CTS Eventim KGaA's Liabilities

Zooming in on the latest balance sheet data, we can see that CTS Eventim KGaA had liabilities of €920.7m due within 12 months and liabilities of €379.4m due beyond that. Offsetting these obligations, it had cash of €694.7m as well as receivables valued at €45.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €559.5m.

Since publicly traded CTS Eventim KGaA shares are worth a total of €5.42b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, CTS Eventim KGaA boasts net cash, so it's fair to say it does not have a heavy debt load! 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 CTS Eventim KGaA'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.

In the last year CTS Eventim KGaA had a loss before interest and tax, and actually shrunk its revenue by 93%, to €92m. To be frank that doesn't bode well.

So How Risky Is CTS Eventim KGaA?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that CTS Eventim KGaA had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €127m of cash and made a loss of €108m. Given it only has net cash of €475.2m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. We've identified 1 warning sign with CTS Eventim KGaA , 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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This article by Simply Wall St is general in nature. 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.
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