Cofidur (EPA:ALCOF) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Cofidur S.A. (EPA:ALCOF) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Cofidur

What Is Cofidur's Net Debt?

As you can see below, at the end of June 2020, Cofidur had €7.12m of debt, up from €1.77m a year ago. Click the image for more detail. But it also has €16.9m in cash to offset that, meaning it has €9.80m net cash.

How Strong Is Cofidur's Balance Sheet?

The latest balance sheet data shows that Cofidur had liabilities of €19.5m due within a year, and liabilities of €5.13m falling due after that. Offsetting these obligations, it had cash of €16.9m as well as receivables valued at €12.4m due within 12 months. So it actually has €4.70m more liquid assets than total liabilities.

This surplus strongly suggests that Cofidur has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Cofidur 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 you can't view debt in total isolation; since Cofidur 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 Cofidur had a loss before interest and tax, and actually shrunk its revenue by 26%, to €57m. That makes us nervous, to say the least.

So How Risky Is Cofidur?

Although Cofidur had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €1.6m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Cofidur has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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.

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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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