Is Comptoir Group (LON:COM) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Comptoir Group PLC (LON:COM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Comptoir Group

What Is Comptoir Group's Net Debt?

The image below, which you can click on for greater detail, shows that Comptoir Group had debt of UK£2.20m at the end of January 2023, a reduction from UK£2.80m over a year. But it also has UK£9.93m in cash to offset that, meaning it has UK£7.73m net cash.

A Look At Comptoir Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Comptoir Group had liabilities of UK£9.35m due within 12 months and liabilities of UK£18.0m due beyond that. Offsetting these obligations, it had cash of UK£9.93m as well as receivables valued at UK£574.9k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£16.8m.

The deficiency here weighs heavily on the UK£7.54m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Comptoir Group would probably need a major re-capitalization if its creditors were to demand repayment. Comptoir Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

We also note that Comptoir Group improved its EBIT from a last year's loss to a positive UK£1.8m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Comptoir Group 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Comptoir Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Comptoir Group actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Comptoir Group does have more liabilities than liquid assets, it also has net cash of UK£7.73m. The cherry on top was that in converted 208% of that EBIT to free cash flow, bringing in UK£3.7m. So while Comptoir Group does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Comptoir Group you should be aware of, and 1 of them shouldn't be ignored.

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.