Is Kerlink (EPA:ALKLK) Weighed On By Its Debt Load?

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.' 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. We note that Kerlink SA (EPA:ALKLK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kerlink

How Much Debt Does Kerlink Carry?

As you can see below, at the end of June 2020, Kerlink had €5.79m of debt, up from €5.03m a year ago. Click the image for more detail. But it also has €6.17m in cash to offset that, meaning it has €377.0k net cash.

How Healthy Is Kerlink's Balance Sheet?

The latest balance sheet data shows that Kerlink had liabilities of €6.71m due within a year, and liabilities of €4.81m falling due after that. On the other hand, it had cash of €6.17m and €2.15m worth of receivables due within a year. So its liabilities total €3.20m more than the combination of its cash and short-term receivables.

Of course, Kerlink has a market capitalization of €20.0m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Kerlink also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kerlink can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Kerlink made a loss at the EBIT level, and saw its revenue drop to €11m, which is a fall of 24%. That makes us nervous, to say the least.

So How Risky Is Kerlink?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Kerlink had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of €3.2m and booked a €6.4m accounting loss. However, it has net cash of €377.0k, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example, we've discovered 3 warning signs for Kerlink that you should be aware of before investing here.

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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