Health Check: How Prudently Does Cogelec (EPA:ALLEC) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Cogelec SA (EPA:ALLEC) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Cogelec

What Is Cogelec's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Cogelec had debt of €10.3m, up from €7.75m in one year. But it also has €12.1m in cash to offset that, meaning it has €1.75m net cash.

How Healthy Is Cogelec's Balance Sheet?

According to the last reported balance sheet, Cogelec had liabilities of €16.8m due within 12 months, and liabilities of €34.7m due beyond 12 months. On the other hand, it had cash of €12.1m and €13.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €26.0m.

While this might seem like a lot, it is not so bad since Cogelec has a market capitalization of €74.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Cogelec 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 Cogelec 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, Cogelec saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Cogelec?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Cogelec had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €4.8m of cash and made a loss of €4.0m. Given it only has net cash of €1.75m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 2 warning signs for Cogelec you should be aware of.

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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