Is Cogra 48 Société Anonyme (EPA:ALCOG) A Risky Investment?

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 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 Cogra 48 Société Anonyme (EPA:ALCOG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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.

View our latest analysis for Cogra 48 Société Anonyme

How Much Debt Does Cogra 48 Société Anonyme Carry?

As you can see below, at the end of June 2020, Cogra 48 Société Anonyme had €9.31m of debt, up from €4.05m a year ago. Click the image for more detail. However, it does have €6.12m in cash offsetting this, leading to net debt of about €3.19m.

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

Zooming in on the latest balance sheet data, we can see that Cogra 48 Société Anonyme had liabilities of €4.06m due within 12 months and liabilities of €8.60m due beyond that. On the other hand, it had cash of €6.12m and €2.75m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.80m.

Of course, Cogra 48 Société Anonyme has a market capitalization of €19.1m, 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's net debt to EBITDA ratio of about 1.6 suggests only moderate use of debt. And its strong interest cover of 23.6 times, makes us even more comfortable. In addition to that, we're happy to report that Cogra 48 Société Anonyme has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Cogra 48 Société Anonyme's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Cogra 48 Société Anonyme recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

Cogra 48 Société Anonyme's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. Looking at all the aforementioned factors together, it strikes us that Cogra 48 Société Anonyme can handle its debt fairly comfortably. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Cogra 48 Société Anonyme you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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