Cliq Digital (ETR:CLIQ) Has A Rock Solid Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Cliq Digital AG (ETR:CLIQ) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Cliq Digital

How Much Debt Does Cliq Digital Carry?

You can click the graphic below for the historical numbers, but it shows that Cliq Digital had €5.91m of debt in September 2021, down from €9.87m, one year before. But on the other hand it also has €6.70m in cash, leading to a €794.2k net cash position.

A Look At Cliq Digital's Liabilities

We can see from the most recent balance sheet that Cliq Digital had liabilities of €25.2m falling due within a year, and liabilities of €7.57m due beyond that. Offsetting this, it had €6.70m in cash and €13.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €12.4m.

Of course, Cliq Digital has a market capitalization of €130.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Cliq Digital also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Cliq Digital has boosted its EBIT by 91%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Cliq Digital's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Cliq Digital may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Cliq Digital produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

We could understand if investors are concerned about Cliq Digital's liabilities, but we can be reassured by the fact it has has net cash of €794.2k. And we liked the look of last year's 91% year-on-year EBIT growth. So we don't think Cliq Digital's use of debt is risky. 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 instance, we've identified 3 warning signs for Cliq Digital that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.