Is Catering International & Services Société Anonyme (EPA:CTRG) 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.' 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 Catering International & Services Société Anonyme (EPA:CTRG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Catering International & Services Société Anonyme

How Much Debt Does Catering International & Services Société Anonyme Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Catering International & Services Société Anonyme had €30.5m of debt, an increase on €27.5m, over one year. However, its balance sheet shows it holds €56.3m in cash, so it actually has €25.8m net cash.

How Healthy Is Catering International & Services Société Anonyme's Balance Sheet?

We can see from the most recent balance sheet that Catering International & Services Société Anonyme had liabilities of €86.2m falling due within a year, and liabilities of €24.3m due beyond that. On the other hand, it had cash of €56.3m and €62.5m worth of receivables due within a year. So it can boast €8.31m more liquid assets than total liabilities.

This short term liquidity is a sign that Catering International & Services Société Anonyme could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Catering International & Services Société Anonyme boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Catering International & Services Société Anonyme grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Catering International & Services Société Anonyme'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Catering International & Services Société Anonyme may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Catering International & Services Société Anonyme generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Catering International & Services Société Anonyme has net cash of €25.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €12m, being 87% of its EBIT. So we don't think Catering International & Services Société Anonyme's use of debt 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. For example, we've discovered 1 warning sign for Catering International & Services Société Anonyme that you should be aware of before investing here.

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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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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