Is CTS Eventim KGaA (ETR:EVD) Using Too Much Debt?

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. As with many other companies CTS Eventim AG & Co. KGaA (ETR:EVD) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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, CTS Eventim KGaA had €64.5m of debt at September 2021, down from €256.3m a year prior. However, it does have €821.6m in cash offsetting this, leading to net cash of €757.1m.

A Look At CTS Eventim KGaA's Liabilities

The latest balance sheet data shows that CTS Eventim KGaA had liabilities of €1.26b due within a year, and liabilities of €227.6m falling due after that. On the other hand, it had cash of €821.6m and €47.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €620.7m.

Given CTS Eventim KGaA has a market capitalization of €5.62b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, CTS Eventim KGaA boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, CTS Eventim KGaA made a loss at the EBIT level, and saw its revenue drop to €208m, which is a fall of 65%. To be frank that doesn't bode well.

So How Risky Is CTS Eventim KGaA?

Although CTS Eventim KGaA had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of €11m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For example - CTS Eventim KGaA has 1 warning sign we think you should be aware of.

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.

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.

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