Is Bernard Loiseau (EPA:ALDBL) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Bernard Loiseau S.A. (EPA:ALDBL) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bernard Loiseau

What Is Bernard Loiseau's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Bernard Loiseau had €8.72m of debt, an increase on €8.27m, over one year. On the flip side, it has €3.20m in cash leading to net debt of about €5.52m.

How Strong Is Bernard Loiseau's Balance Sheet?

The latest balance sheet data shows that Bernard Loiseau had liabilities of €4.27m due within a year, and liabilities of €6.78m falling due after that. Offsetting these obligations, it had cash of €3.20m as well as receivables valued at €1.03m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €6.82m.

When you consider that this deficiency exceeds the company's €5.85m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Bernard Loiseau 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 Bernard Loiseau had a loss before interest and tax, and actually shrunk its revenue by 4.1%, to €8.4m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Bernard Loiseau produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable €735k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of €1.1m. And until that time we think this is a 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. We've identified 2 warning signs with Bernard Loiseau , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.