Groupe Tera (EPA:ALGTR) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Groupe Tera SA (EPA:ALGTR) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Groupe Tera

What Is Groupe Tera's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Groupe Tera had debt of €3.34m, up from €1.29m in one year. But it also has €3.88m in cash to offset that, meaning it has €545.0k net cash.

A Look At Groupe Tera's Liabilities

The latest balance sheet data shows that Groupe Tera had liabilities of €3.53m due within a year, and liabilities of €6.02m falling due after that. On the other hand, it had cash of €3.88m and €3.23m worth of receivables due within a year. So it has liabilities totalling €2.44m more than its cash and near-term receivables, combined.

Since publicly traded Groupe Tera shares are worth a total of €14.0m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Groupe Tera also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Groupe Tera's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Groupe Tera wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to €5.1m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Groupe Tera?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Groupe Tera had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €2.0m of cash and made a loss of €738k. But the saving grace is the €545.0k on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Groupe Tera that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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