We Think Claranova (EPA:CLA) Can Stay On Top Of Its Debt

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. As with many other companies Claranova SE (EPA:CLA) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Claranova

How Much Debt Does Claranova Carry?

As you can see below, at the end of December 2021, Claranova had €150.2m of debt, up from €71.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds €152.0m in cash, so it actually has €1.80m net cash.

How Strong Is Claranova's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Claranova had liabilities of €131.1m due within 12 months and liabilities of €145.5m due beyond that. Offsetting this, it had €152.0m in cash and €23.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €101.4m.

This deficit is considerable relative to its market capitalization of €164.7m, so it does suggest shareholders should keep an eye on Claranova's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Claranova also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also relevant is that Claranova has grown its EBIT by a very respectable 26% in the last year, thus enhancing its ability to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Claranova's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Claranova has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Claranova actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although Claranova's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €1.80m. The cherry on top was that in converted 134% of that EBIT to free cash flow, bringing in €27m. So we are not troubled with Claranova's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Claranova is showing 3 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. 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.