Is Kerlink (EPA:ALKLK) A Risky Investment?

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.' 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. Importantly, Kerlink SA (EPA:ALKLK) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kerlink

What Is Kerlink's Net Debt?

As you can see below, at the end of December 2021, Kerlink had €9.25m of debt, up from €8.08m a year ago. Click the image for more detail. But it also has €14.5m in cash to offset that, meaning it has €5.28m net cash.

How Strong Is Kerlink's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kerlink had liabilities of €11.9m due within 12 months and liabilities of €5.55m due beyond that. Offsetting these obligations, it had cash of €14.5m as well as receivables valued at €5.80m due within 12 months. So it actually has €2.92m more liquid assets than total liabilities.

This surplus suggests that Kerlink has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kerlink boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kerlink can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Kerlink reported revenue of €20m, which is a gain of 78%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Kerlink?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Kerlink had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €3.0m and booked a €1.8m accounting loss. But at least it has €5.28m on the balance sheet to spend on growth, near-term. Kerlink's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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, we've discovered 2 warning signs for Kerlink that you should be aware of before investing here.

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.