Is INTERSHOP Communications (ETR:ISHA) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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

What Is INTERSHOP Communications's Debt?

The image below, which you can click on for greater detail, shows that INTERSHOP Communications had debt of €3.96m at the end of September 2023, a reduction from €5.29m over a year. However, it does have €8.59m in cash offsetting this, leading to net cash of €4.63m.

A Look At INTERSHOP Communications' Liabilities

The latest balance sheet data shows that INTERSHOP Communications had liabilities of €12.3m due within a year, and liabilities of €13.0m falling due after that. Offsetting this, it had €8.59m in cash and €5.69m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €11.0m.

While this might seem like a lot, it is not so bad since INTERSHOP Communications has a market capitalization of €24.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, INTERSHOP Communications boasts net cash, so it's fair to say it does not have a heavy debt load! 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 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 €38m, which is a gain of 2.5%, 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?

While INTERSHOP Communications lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €825k. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for INTERSHOP Communications that you should be aware of before investing here.

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.