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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Compagnie du Cambodge (EPA:CBDG) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Compagnie du Cambodge's Debt?
You can click the graphic below for the historical numbers, but it shows that Compagnie du Cambodge had €41.4m of debt in June 2020, down from €48.7m, one year before. But on the other hand it also has €1.33b in cash, leading to a €1.28b net cash position.
A Look At Compagnie du Cambodge's Liabilities
We can see from the most recent balance sheet that Compagnie du Cambodge had liabilities of €91.9m falling due within a year, and liabilities of €25.6m due beyond that. Offsetting this, it had €1.33b in cash and €10.9m in receivables that were due within 12 months. So it actually has €1.22b more liquid assets than total liabilities.
This surplus liquidity suggests that Compagnie du Cambodge's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Compagnie du Cambodge boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Compagnie du Cambodge 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.
Over 12 months, Compagnie du Cambodge saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
So How Risky Is Compagnie du Cambodge?
While Compagnie du Cambodge lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €14m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Compagnie du Cambodge has 2 warning signs (and 1 which doesn't sit too well with us) we think 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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