Health Check: How Prudently Does co.don (ETR:CNWK) Use 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.' 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. We note that co.don AG (ETR:CNWK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for co.don

How Much Debt Does co.don Carry?

You can click the graphic below for the historical numbers, but it shows that co.don had €3.41m of debt in December 2020, down from €7.08m, one year before. But on the other hand it also has €9.30m in cash, leading to a €5.90m net cash position.

How Strong Is co.don's Balance Sheet?

The latest balance sheet data shows that co.don had liabilities of €2.85m due within a year, and liabilities of €5.54m falling due after that. Offsetting these obligations, it had cash of €9.30m as well as receivables valued at €1.57m due within 12 months. So it can boast €2.47m more liquid assets than total liabilities.

This short term liquidity is a sign that co.don could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, co.don 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 co.don'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, co.don reported revenue of €7.1m, which is a gain of 2.8%, 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.

So How Risky Is co.don?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year co.don had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €10m of cash and made a loss of €14m. With only €5.90m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for co.don you should be aware of.

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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