Is centrotherm international (FRA:CTNK) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 centrotherm international AG (FRA:CTNK) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for centrotherm international

What Is centrotherm international's Net Debt?

You can click the graphic below for the historical numbers, but it shows that centrotherm international had €16.7m of debt in December 2020, down from €24.9m, one year before. However, it does have €33.3m in cash offsetting this, leading to net cash of €16.6m.

How Strong Is centrotherm international's Balance Sheet?

The latest balance sheet data shows that centrotherm international had liabilities of €189.4m due within a year, and liabilities of €18.7m falling due after that. Offsetting this, it had €33.3m in cash and €22.4m in receivables that were due within 12 months. So its liabilities total €152.4m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €71.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, centrotherm international would likely require a major re-capitalisation if it had to pay its creditors today. centrotherm international boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since centrotherm international will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year centrotherm international wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to €111m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is centrotherm international?

Although centrotherm international had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €11m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with centrotherm international (at least 1 which is significant) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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