CENIT (ETR:CSH) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 CENIT Aktiengesellschaft (ETR:CSH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CENIT

How Much Debt Does CENIT Carry?

As you can see below, at the end of September 2022, CENIT had €22.2m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds €22.8m in cash, so it actually has €589.0k net cash.

A Look At CENIT's Liabilities

According to the last reported balance sheet, CENIT had liabilities of €63.8m due within 12 months, and liabilities of €10.6m due beyond 12 months. Offsetting these obligations, it had cash of €22.8m as well as receivables valued at €27.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €24.2m.

This deficit isn't so bad because CENIT is worth €101.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, CENIT boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that CENIT has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. 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 CENIT 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While CENIT has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, CENIT actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although CENIT's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €589.0k. And it impressed us with free cash flow of €11m, being 159% of its EBIT. So is CENIT's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for CENIT that 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. 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.