Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Cerinnov Group SA (EPA:ALPCV) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Cerinnov Group's Debt?
As you can see below, at the end of June 2020, Cerinnov Group had €10.00m of debt, up from €7.28m a year ago. Click the image for more detail. However, it also had €3.26m in cash, and so its net debt is €6.74m.
How Strong Is Cerinnov Group's Balance Sheet?
The latest balance sheet data shows that Cerinnov Group had liabilities of €7.49m due within a year, and liabilities of €8.75m falling due after that. On the other hand, it had cash of €3.26m and €7.31m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €5.68m.
This deficit is considerable relative to its market capitalization of €6.05m, so it does suggest shareholders should keep an eye on Cerinnov Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Cerinnov Group'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.
In the last year Cerinnov Group had a loss before interest and tax, and actually shrunk its revenue by 38%, to €12m. To be frank that doesn't bode well.
While Cerinnov Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable €3.0m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €2.9m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 5 warning signs for Cerinnov Group (of which 2 are a bit unpleasant!) you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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