Componenta (HEL:CTH1V) Has A Somewhat Strained Balance Sheet

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. We can see that Componenta Corporation (HEL:CTH1V) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Componenta

What Is Componenta's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Componenta had €4.65m of debt, an increase on €4.40m, over one year. But on the other hand it also has €6.46m in cash, leading to a €1.80m net cash position.

How Healthy Is Componenta's Balance Sheet?

We can see from the most recent balance sheet that Componenta had liabilities of €22.8m falling due within a year, and liabilities of €12.6m due beyond that. Offsetting these obligations, it had cash of €6.46m as well as receivables valued at €4.62m due within 12 months. So its liabilities total €24.3m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €27.7m, so it does suggest shareholders should keep an eye on Componenta's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Componenta boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Componenta's EBIT fell a jaw-dropping 97% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Componenta's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Componenta has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Componenta recorded free cash flow of 32% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Componenta's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €1.80m. Despite the cash, we do find Componenta's EBIT growth rate concerning, so we're not particularly comfortable with the stock. 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. We've identified 1 warning sign with Componenta , and understanding them should be part of your investment process.

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. 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.