Is INTERSHOP Communications (ETR:ISHA) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that INTERSHOP Communications Aktiengesellschaft (ETR:ISHA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for INTERSHOP Communications

How Much Debt Does INTERSHOP Communications Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 INTERSHOP Communications had €4.20m of debt, an increase on €3.04m, over one year. But it also has €11.1m in cash to offset that, meaning it has €6.93m net cash.

How Healthy Is INTERSHOP Communications' Balance Sheet?

We can see from the most recent balance sheet that INTERSHOP Communications had liabilities of €14.1m falling due within a year, and liabilities of €14.2m due beyond that. Offsetting this, it had €11.1m in cash and €5.76m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €11.4m.

This deficit isn't so bad because INTERSHOP Communications is worth €26.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, 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.

In the last year INTERSHOP Communications's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is INTERSHOP Communications?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months INTERSHOP Communications lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €1.5m of cash and made a loss of €4.5m. While this does make the company a bit risky, it's important to remember it has net cash of €6.93m. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with INTERSHOP Communications .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.