Health Check: How Prudently Does Compagnie du Cambodge (EPA:CBDG) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Compagnie du Cambodge (EPA:CBDG) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Compagnie du Cambodge

What Is Compagnie du Cambodge's Net Debt?

As you can see below, Compagnie du Cambodge had €39.1m of debt at June 2021, down from €41.4m a year prior. But on the other hand it also has €1.17b in cash, leading to a €1.13b net cash position.

A Look At Compagnie du Cambodge's Liabilities

Zooming in on the latest balance sheet data, we can see that Compagnie du Cambodge had liabilities of €88.9m due within 12 months and liabilities of €11.6m due beyond that. Offsetting this, it had €1.17b in cash and €10.7m in receivables that were due within 12 months. So it can boast €1.08b more liquid assets than total liabilities.

This excess liquidity suggests that Compagnie du Cambodge is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Compagnie du Cambodge 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 you can't view debt in total isolation; since Compagnie du Cambodge will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Compagnie du Cambodge made a loss at the EBIT level, and saw its revenue drop to €57m, which is a fall of 3.2%. That's not what we would hope to see.

So How Risky Is Compagnie du Cambodge?

While Compagnie du Cambodge lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of €25m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Compagnie du Cambodge you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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