Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Invibes Advertising N.V. (EPA:ALINV) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Invibes Advertising Carry?
The image below, which you can click on for greater detail, shows that at December 2020 Invibes Advertising had debt of €5.25m, up from €1.78m in one year. But on the other hand it also has €6.87m in cash, leading to a €1.62m net cash position.
How Healthy Is Invibes Advertising's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Invibes Advertising had liabilities of €7.66m due within 12 months and liabilities of €3.07m due beyond that. Offsetting these obligations, it had cash of €6.87m as well as receivables valued at €5.61m due within 12 months. So it can boast €1.75m more liquid assets than total liabilities.
This short term liquidity is a sign that Invibes Advertising could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Invibes Advertising boasts net cash, so it's fair to say it does not have a heavy debt load!
Unfortunately, Invibes Advertising's EBIT flopped 15% over the last four quarters. If that sort of decline is not arrested, then the managing its debt will be harder than selling broccoli flavoured ice-cream for a premium. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Invibes Advertising can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Invibes Advertising 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 two years, Invibes Advertising burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While we empathize with investors who find debt concerning, you should keep in mind that Invibes Advertising has net cash of €1.62m, as well as more liquid assets than liabilities. So while Invibes Advertising does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Invibes Advertising (of which 2 are a bit concerning!) you should know about.
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.
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