Is INTERSHOP Communications (ETR:ISHA) Using Too Much Debt?

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.' 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?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for INTERSHOP Communications

What Is INTERSHOP Communications's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 INTERSHOP Communications had €4.40m of debt, an increase on €3.34m, over one year. But on the other hand it also has €12.3m in cash, leading to a €7.90m net cash position.

A Look At INTERSHOP Communications' Liabilities

We can see from the most recent balance sheet that INTERSHOP Communications had liabilities of €11.6m falling due within a year, and liabilities of €11.8m due beyond that. Offsetting this, it had €12.3m in cash and €6.31m in receivables that were due within 12 months. So it has liabilities totalling €4.86m more than its cash and near-term receivables, combined.

Given INTERSHOP Communications has a market capitalization of €56.5m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, INTERSHOP Communications boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, INTERSHOP Communications made a loss at the EBIT level, last year, but improved that to positive EBIT of €1.1m in the last twelve months. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While INTERSHOP Communications 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. Over the last year, INTERSHOP Communications actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about INTERSHOP Communications's liabilities, but we can be reassured by the fact it has has net cash of €7.90m. The cherry on top was that in converted 195% of that EBIT to free cash flow, bringing in €2.2m. So we don't have any problem with INTERSHOP Communications's use of debt. 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. Case in point: We've spotted 1 warning sign for INTERSHOP Communications 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. 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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