Health Check: How Prudently Does Netgem (EPA:ALNTG) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Netgem SA (EPA:ALNTG) makes use of debt. But is this debt a concern to shareholders?

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. 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, 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.

View our latest analysis for Netgem

How Much Debt Does Netgem Carry?

The image below, which you can click on for greater detail, shows that Netgem had debt of €2.05m at the end of December 2021, a reduction from €7.52m over a year. But on the other hand it also has €6.45m in cash, leading to a €4.40m net cash position.

A Look At Netgem's Liabilities

Zooming in on the latest balance sheet data, we can see that Netgem had liabilities of €17.4m due within 12 months and liabilities of €531.0k due beyond that. On the other hand, it had cash of €6.45m and €8.00m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.52m.

Of course, Netgem has a market capitalization of €40.4m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Netgem also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Netgem's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Netgem made a loss at the EBIT level, and saw its revenue drop to €28m, which is a fall of 6.5%. That's not what we would hope to see.

So How Risky Is Netgem?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Netgem lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €147k of cash and made a loss of €1.3m. Given it only has net cash of €4.40m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. 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 2 warning signs for Netgem (of which 1 can't be ignored!) 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.