INTERSHOP Communications (ETR:ISHA) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, INTERSHOP Communications Aktiengesellschaft (ETR:ISHA) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for INTERSHOP Communications

How Much Debt Does INTERSHOP Communications Carry?

The image below, which you can click on for greater detail, shows that at September 2020 INTERSHOP Communications had debt of €4.64m, up from €1.67m in one year. However, its balance sheet shows it holds €11.3m in cash, so it actually has €6.65m net cash.

How Healthy Is INTERSHOP Communications' Balance Sheet?

The latest balance sheet data shows that INTERSHOP Communications had liabilities of €9.61m due within a year, and liabilities of €3.12m falling due after that. Offsetting these obligations, it had cash of €11.3m as well as receivables valued at €5.39m due within 12 months. So it actually has €3.96m more liquid assets than total liabilities.

This short term liquidity is a sign that INTERSHOP Communications could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, INTERSHOP Communications boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if INTERSHOP Communications 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, INTERSHOP Communications reported revenue of €33m, which is a gain of 6.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is INTERSHOP Communications?

Although INTERSHOP Communications had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €911k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 example, we've discovered 2 warning signs for INTERSHOP Communications that you should be aware of before investing here.

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. 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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