Konsolidator (CPH:KONSOL) Is Carrying A Fair Bit Of 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. We note that Konsolidator A/S (CPH:KONSOL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Konsolidator

What Is Konsolidator's Debt?

As you can see below, Konsolidator had kr.13.1m of debt at December 2023, down from kr.23.8m a year prior. However, it also had kr.1.83m in cash, and so its net debt is kr.11.2m.

A Look At Konsolidator's Liabilities

According to the last reported balance sheet, Konsolidator had liabilities of kr.6.35m due within 12 months, and liabilities of kr.16.2m due beyond 12 months. Offsetting these obligations, it had cash of kr.1.83m as well as receivables valued at kr.1.63m due within 12 months. So its liabilities total kr.19.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Konsolidator is worth kr.80.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Konsolidator will need earnings to service that debt. 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.

In the last year Konsolidator wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to kr.19m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Konsolidator had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping kr.11m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled kr.9.8m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example Konsolidator has 6 warning signs (and 3 which are a bit unpleasant) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.