Is Netgem (EPA:ALNTG) Weighed On By Its Debt Load?

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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Netgem

What Is Netgem's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Netgem had debt of €7.52m, up from €764.0k in one year. But on the other hand it also has €10.2m in cash, leading to a €2.69m net cash position.

How Strong Is Netgem's Balance Sheet?

The latest balance sheet data shows that Netgem had liabilities of €23.5m due within a year, and liabilities of €2.11m falling due after that. Offsetting this, it had €10.2m in cash and €10.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.95m.

Given Netgem has a market capitalization of €36.3m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Netgem 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 ultimately the future profitability of the business will decide if Netgem can strengthen its balance sheet over time. 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 reported revenue of €30m, which is a gain of 20%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Netgem?

Although Netgem had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of €7.2m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Netgem (including 2 which can't be ignored) .

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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