We Think INTERSHOP Communications (ETR:ISHA) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies INTERSHOP Communications Aktiengesellschaft (ETR:ISHA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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?

As you can see below, at the end of June 2021, INTERSHOP Communications had €3.05m of debt, up from €1.77m a year ago. Click the image for more detail. But it also has €11.6m in cash to offset that, meaning it has €8.60m net cash.

How Strong Is INTERSHOP Communications' Balance Sheet?

The latest balance sheet data shows that INTERSHOP Communications had liabilities of €9.98m due within a year, and liabilities of €11.7m falling due after that. Offsetting these obligations, it had cash of €11.6m as well as receivables valued at €6.43m due within 12 months. So it has liabilities totalling €3.61m more than its cash and near-term receivables, combined.

Of course, INTERSHOP Communications has a market capitalization of €84.3m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, INTERSHOP Communications boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that INTERSHOP Communications improved its EBIT from a last year's loss to a positive €1.1m. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. INTERSHOP Communications may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, INTERSHOP Communications actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 €8.60m. And it impressed us with free cash flow of €3.0m, being 272% of its EBIT. So we are not troubled with INTERSHOP Communications's debt use. 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. To that end, you should be aware of the 3 warning signs 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.

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.

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