Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Delticom AG (ETR:DEX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Delticom
What Is Delticom's Net Debt?
The image below, which you can click on for greater detail, shows that Delticom had debt of €36.1m at the end of December 2020, a reduction from €63.8m over a year. However, it does have €5.64m in cash offsetting this, leading to net debt of about €30.4m.
A Look At Delticom's Liabilities
The latest balance sheet data shows that Delticom had liabilities of €135.0m due within a year, and liabilities of €50.0m falling due after that. Offsetting these obligations, it had cash of €5.64m as well as receivables valued at €32.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €146.5m.
Given this deficit is actually higher than the company's market capitalization of €99.5m, we think shareholders really should watch Delticom's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Delticom can strengthen its balance sheet over time. 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, Delticom made a loss at the EBIT level, and saw its revenue drop to €541m, which is a fall of 13%. That's not what we would hope to see.
Caveat Emptor
Not only did Delticom's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €2.2m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of €6.7m and free cash flow of €34m. So one might argue that there's still a chance it can get things on the right track. 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 Delticom 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. 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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About XTRA:DEX
Solid track record with excellent balance sheet.
