Is Delticom (ETR:DEX) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Delticom AG (ETR:DEX) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Delticom

How Much Debt Does Delticom Carry?

As you can see below, at the end of June 2023, Delticom had €35.2m of debt, up from €30.2m a year ago. Click the image for more detail. However, because it has a cash reserve of €2.47m, its net debt is less, at about €32.7m.

How Strong Is Delticom's Balance Sheet?

The latest balance sheet data shows that Delticom had liabilities of €142.1m due within a year, and liabilities of €52.1m falling due after that. Offsetting these obligations, it had cash of €2.47m as well as receivables valued at €17.2m due within 12 months. So its liabilities total €174.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €32.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Delticom would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Delticom'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 Delticom had a loss before interest and tax, and actually shrunk its revenue by 12%, to €487m. 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 €3.2m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. However, we note that trailing twelve month EBIT is worse than the free cash flow of €1.2m and the profit of €1.5m. So there is arguably potential that the company is going to turn things around. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Delticom (1 is potentially serious!) that you should be aware of before investing here.

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.