Is Cofidur (EPA:ALCOF) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Cofidur S.A. (EPA:ALCOF) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Cofidur

How Much Debt Does Cofidur Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Cofidur had €6.78m of debt, an increase on €1.86m, over one year. But on the other hand it also has €21.3m in cash, leading to a €14.5m net cash position.

How Strong Is Cofidur's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cofidur had liabilities of €17.4m due within 12 months and liabilities of €4.77m due beyond that. Offsetting this, it had €21.3m in cash and €9.02m in receivables that were due within 12 months. So it can boast €8.17m 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). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Cofidur has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Cofidur will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Cofidur had a loss before interest and tax, and actually shrunk its revenue by 26%, to €51m. That makes us nervous, to say the least.

So How Risky Is Cofidur?

While Cofidur lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €1.5m. 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. The next few years will be important as the business matures. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Cofidur (1 is a bit concerning) you should be aware of.

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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