Is Componenta (HEL:CTH1V) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 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.

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Componenta

How Much Debt Does Componenta Carry?

As you can see below, Componenta had €4.04m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has €12.0m in cash to offset that, meaning it has €7.95m net cash.

How Healthy Is Componenta's Balance Sheet?

We can see from the most recent balance sheet that Componenta had liabilities of €23.6m falling due within a year, and liabilities of €14.1m due beyond that. Offsetting this, it had €12.0m in cash and €4.03m in receivables that were due within 12 months. So its liabilities total €21.6m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €31.3m, 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! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Componenta 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.

In the last year Componenta wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to €77m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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 €4.4m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Componenta (of which 2 shouldn't be ignored!) you should know about.

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.

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