Is Netgem (EPA:ALNTG) Using Too Much 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. We can see that Netgem SA (EPA:ALNTG) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Netgem

What Is Netgem's Net Debt?

As you can see below, Netgem had €2.81m of debt at June 2021, down from €3.84m a year prior. However, it does have €7.65m in cash offsetting this, leading to net cash of €4.84m.

How Healthy Is Netgem's Balance Sheet?

We can see from the most recent balance sheet that Netgem had liabilities of €20.2m falling due within a year, and liabilities of €843.0k due beyond that. On the other hand, it had cash of €7.65m and €8.58m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.78m.

Since publicly traded Netgem shares are worth a total of €40.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Netgem boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Netgem 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 Netgem wasn't profitable at an EBIT level, but managed to grow its revenue by 7.6%, to €30m. We usually like to see faster growth from unprofitable companies, but each to their own.

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 in the last year Netgem had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €1.9m and booked a €2.3m accounting loss. Given it only has net cash of €4.84m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example - Netgem has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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