Is Componenta (HEL:CTH1V) 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.' 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 can see that Componenta Corporation (HEL:CTH1V) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Componenta

How Much Debt Does Componenta Carry?

As you can see below, at the end of December 2020, Componenta had €4.78m of debt, up from €4.00m a year ago. Click the image for more detail. But on the other hand it also has €16.8m in cash, leading to a €12.0m net cash position.

How Healthy Is Componenta's Balance Sheet?

The latest balance sheet data shows that Componenta had liabilities of €18.5m due within a year, and liabilities of €21.7m falling due after that. Offsetting these obligations, it had cash of €16.8m as well as receivables valued at €1.99m due within 12 months. So it has liabilities totalling €21.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €28.4m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Componenta 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 it is Componenta's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Componenta reported revenue of €70m, which is a gain of 38%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Componenta?

While Componenta lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €4.9m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Componenta shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. Be aware that Componenta is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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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