Does Catenon (BME:COM) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Catenon, S.A. (BME:COM) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Catenon

What Is Catenon's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Catenon had debt of €2.17m, up from €1.81m in one year. However, because it has a cash reserve of €574.4k, its net debt is less, at about €1.59m.

A Look At Catenon's Liabilities

Zooming in on the latest balance sheet data, we can see that Catenon had liabilities of €1.94m due within 12 months and liabilities of €1.55m due beyond that. Offsetting these obligations, it had cash of €574.4k as well as receivables valued at €2.64m due within 12 months. So its liabilities total €267.1k more than the combination of its cash and short-term receivables.

This state of affairs indicates that Catenon's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €21.1m company is short on cash, but still worth keeping an eye on the balance sheet.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Catenon has a rather high debt to EBITDA ratio of 20.8 which suggests a meaningful debt load. However, its interest coverage of 4.5 is reasonably strong, which is a good sign. One redeeming factor for Catenon is that it turned last year's EBIT loss into a gain of €287k, over the last twelve months. 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 Catenon 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Catenon saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Both Catenon's conversion of EBIT to free cash flow and its net debt to EBITDA were discouraging. At least its level of total liabilities gives us reason to be optimistic. Taking the abovementioned factors together we do think Catenon's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. 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, we've discovered 2 warning signs for Catenon (1 shouldn't be ignored!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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