Here's Why Cibox Inter@ctive (EPA:CIB) Can Afford Some 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 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. We can see that Cibox Inter@ctive (EPA:CIB) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Cibox Inter@ctive

What Is Cibox Inter@ctive's Net Debt?

The chart below, which you can click on for greater detail, shows that Cibox Inter@ctive had €6.23m in debt in December 2021; about the same as the year before. However, it also had €5.77m in cash, and so its net debt is €459.0k.

How Healthy Is Cibox Inter@ctive's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cibox Inter@ctive had liabilities of €8.59m due within 12 months and liabilities of €1.09m due beyond that. Offsetting this, it had €5.77m in cash and €6.20m in receivables that were due within 12 months. So it can boast €2.29m more liquid assets than total liabilities.

This excess liquidity suggests that Cibox Inter@ctive is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Cibox Inter@ctive 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 Cibox Inter@ctive wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to €16m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Cibox Inter@ctive had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €37k. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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 4 warning signs for Cibox Inter@ctive (1 shouldn't be ignored!) that you should be aware of before investing here.

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. 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.