Here's Why Cogra 48 Société Anonyme (EPA:ALCOG) Can Manage Its Debt Responsibly

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 can see that Cogra 48 Société Anonyme (EPA:ALCOG) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Cogra 48 Société Anonyme

What Is Cogra 48 Société Anonyme's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Cogra 48 Société Anonyme had €11.7m of debt in December 2022, down from €13.4m, one year before. However, it also had €4.03m in cash, and so its net debt is €7.69m.

How Strong Is Cogra 48 Société Anonyme's Balance Sheet?

According to the last reported balance sheet, Cogra 48 Société Anonyme had liabilities of €10.5m due within 12 months, and liabilities of €8.78m due beyond 12 months. On the other hand, it had cash of €4.03m and €8.37m worth of receivables due within a year. So it has liabilities totalling €6.88m more than its cash and near-term receivables, combined.

Of course, Cogra 48 Société Anonyme has a market capitalization of €38.7m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Cogra 48 Société Anonyme has a low net debt to EBITDA ratio of only 0.84. And its EBIT easily covers its interest expense, being 135 times the size. So we're pretty relaxed about its super-conservative use of debt. Even more impressive was the fact that Cogra 48 Société Anonyme grew its EBIT by 232% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Cogra 48 Société Anonyme'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Considering the last three years, Cogra 48 Société Anonyme actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

The good news is that Cogra 48 Société Anonyme's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. All these things considered, it appears that Cogra 48 Société Anonyme can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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. Case in point: We've spotted 1 warning sign for Cogra 48 Société Anonyme you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.