Is NorCom Information Technology GmbH KGaA (ETR:NC5A) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies NorCom Information Technology GmbH & Co. KGaA (ETR:NC5A) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for NorCom Information Technology GmbH KGaA

What Is NorCom Information Technology GmbH KGaA's Net Debt?

As you can see below, NorCom Information Technology GmbH KGaA had €1.58m of debt at December 2020, down from €1.89m a year prior. However, its balance sheet shows it holds €4.49m in cash, so it actually has €2.91m net cash.

How Strong Is NorCom Information Technology GmbH KGaA's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NorCom Information Technology GmbH KGaA had liabilities of €2.25m due within 12 months and liabilities of €2.93m due beyond that. Offsetting this, it had €4.49m in cash and €1.71m in receivables that were due within 12 months. So it actually has €1.02m more liquid assets than total liabilities.

This surplus suggests that NorCom Information Technology GmbH KGaA has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that NorCom Information Technology GmbH KGaA has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is NorCom Information Technology GmbH KGaA's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, NorCom Information Technology GmbH KGaA made a loss at the EBIT level, and saw its revenue drop to €11m, which is a fall of 11%. That's not what we would hope to see.

So How Risky Is NorCom Information Technology GmbH KGaA?

While NorCom Information Technology GmbH KGaA lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of €164k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with NorCom Information Technology GmbH KGaA (including 1 which makes us a bit uncomfortable) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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