Health Check: How Prudently Does Compagnie du Cambodge (EPA:CBDG) Use Debt?

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. As with many other companies Compagnie du Cambodge (EPA:CBDG) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Compagnie du Cambodge

What Is Compagnie du Cambodge's Debt?

As you can see below, Compagnie du Cambodge had €1.90m of debt at December 2021, down from €39.1m a year prior. However, its balance sheet shows it holds €1.18b in cash, so it actually has €1.18b net cash.

How Healthy Is Compagnie du Cambodge's Balance Sheet?

The latest balance sheet data shows that Compagnie du Cambodge had liabilities of €4.00m due within a year, and liabilities of €7.60m falling due after that. Offsetting this, it had €1.18b in cash and €900.0k in receivables that were due within 12 months. So it can boast €1.17b more liquid assets than total liabilities.

This surplus strongly suggests that Compagnie du Cambodge has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Compagnie du Cambodge has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Compagnie du Cambodge's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

It seems likely shareholders hope that Compagnie du Cambodge can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Compagnie du Cambodge?

While Compagnie du Cambodge lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €3.5m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too 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. Be aware that Compagnie du Cambodge is showing 2 warning signs in our investment analysis , you should know about...

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.