namR Société anonyme (EPA:ALNMR) Is Making Moderate Use Of 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.' 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. Importantly, namR Société anonyme (EPA:ALNMR) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for namR Société anonyme

What Is namR Société anonyme's Net Debt?

As you can see below, at the end of December 2023, namR Société anonyme had €6.54m of debt, up from €5.78m a year ago. Click the image for more detail. However, because it has a cash reserve of €2.34m, its net debt is less, at about €4.20m.

How Strong Is namR Société anonyme's Balance Sheet?

We can see from the most recent balance sheet that namR Société anonyme had liabilities of €2.14m falling due within a year, and liabilities of €6.54m due beyond that. Offsetting these obligations, it had cash of €2.34m as well as receivables valued at €1.59m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.74m.

namR Société anonyme has a market capitalization of €7.99m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 namR Société anonyme 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 namR Société anonyme wasn't profitable at an EBIT level, but managed to grow its revenue by 38%, to €4.3m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, namR Société anonyme still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €4.3m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of €4.0m. So we do think this stock is quite risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for namR Société anonyme (of which 3 are significant!) 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. 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.