Is Adocia (EPA:ADOC) A Risky Investment?

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.' 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 Adocia SA (EPA:ADOC) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Adocia

What Is Adocia's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Adocia had €28.0m of debt, an increase on €21.2m, over one year. But on the other hand it also has €28.1m in cash, leading to a €120.0k net cash position.

A Look At Adocia's Liabilities

Zooming in on the latest balance sheet data, we can see that Adocia had liabilities of €10.7m due within 12 months and liabilities of €28.1m due beyond that. On the other hand, it had cash of €28.1m and €7.12m worth of receivables due within a year. So it has liabilities totalling €3.60m more than its cash and near-term receivables, combined.

Of course, Adocia has a market capitalization of €60.9m, 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. Despite its noteworthy liabilities, Adocia boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Adocia 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.

In the last year Adocia had a loss before interest and tax, and actually shrunk its revenue by 16%, to €6.8m. That's not what we would hope to see.

So How Risky Is Adocia?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Adocia had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €22m of cash and made a loss of €23m. While this does make the company a bit risky, it's important to remember it has net cash of €120.0k. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that Adocia is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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