Stock Analysis

Is Konsolidator (CPH:KONSOL) Using Too Much Debt?

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Warren Buffett famously said, '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. Importantly, Konsolidator A/S (CPH:KONSOL) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Konsolidator

What Is Konsolidator's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Konsolidator had debt of kr.21.6m, up from kr.36.0k in one year. However, its balance sheet shows it holds kr.24.8m in cash, so it actually has kr.3.14m net cash.

CPSE:KONSOL Debt to Equity History December 17th 2021

How Healthy Is Konsolidator's Balance Sheet?

The latest balance sheet data shows that Konsolidator had liabilities of kr.4.87m due within a year, and liabilities of kr.26.4m falling due after that. Offsetting this, it had kr.24.8m in cash and kr.2.29m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr.4.19m.

Since publicly traded Konsolidator shares are worth a total of kr.200.9m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Konsolidator 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 you can't view debt in total isolation; since Konsolidator will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Konsolidator reported revenue of kr.11m, which is a gain of 89%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Konsolidator?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Konsolidator lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through kr.24m of cash and made a loss of kr.22m. With only kr.3.14m on the balance sheet, it would appear that its going to need to raise capital again soon. Konsolidator's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. We've identified 4 warning signs with Konsolidator (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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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