We Think Travel Technology Interactive (EPA:ALTTI) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Travel Technology Interactive (EPA:ALTTI) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Travel Technology Interactive

How Much Debt Does Travel Technology Interactive Carry?

The image below, which you can click on for greater detail, shows that Travel Technology Interactive had debt of €1.96m at the end of December 2020, a reduction from €3.12m over a year. However, because it has a cash reserve of €1.01m, its net debt is less, at about €951.0k.

How Strong Is Travel Technology Interactive's Balance Sheet?

According to the last reported balance sheet, Travel Technology Interactive had liabilities of €1.71m due within 12 months, and liabilities of €2.20m due beyond 12 months. Offsetting this, it had €1.01m in cash and €1.46m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.44m.

Given Travel Technology Interactive has a market capitalization of €39.4m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Travel Technology Interactive will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Travel Technology Interactive had a loss before interest and tax, and actually shrunk its revenue by 32%, to €3.5m. That makes us nervous, to say the least.

Caveat Emptor

While Travel Technology Interactive's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €227k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of €680k into a profit. So to be blunt we do think it is risky. 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. For example Travel Technology Interactive has 4 warning signs (and 1 which can't be ignored) we think 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. 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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