Intracom Constructions Societe Anonyme Technical and Steel Constructions (ATH:INKAT) Seems To Be Using A Lot Of 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 note that Intracom Constructions Societe Anonyme Technical and Steel Constructions (ATH:INKAT) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Intracom Constructions Societe Anonyme Technical and Steel Constructions

How Much Debt Does Intracom Constructions Societe Anonyme Technical and Steel Constructions Carry?

As you can see below, Intracom Constructions Societe Anonyme Technical and Steel Constructions had €66.0m of debt at June 2020, down from €78.7m a year prior. However, it does have €4.08m in cash offsetting this, leading to net debt of about €62.0m.

How Strong Is Intracom Constructions Societe Anonyme Technical and Steel Constructions's Balance Sheet?

According to the last reported balance sheet, Intracom Constructions Societe Anonyme Technical and Steel Constructions had liabilities of €194.5m due within 12 months, and liabilities of €32.2m due beyond 12 months. Offsetting this, it had €4.08m in cash and €172.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €49.8m.

When you consider that this deficiency exceeds the company's €41.1m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.39 times and a disturbingly high net debt to EBITDA ratio of 10.2 hit our confidence in Intracom Constructions Societe Anonyme Technical and Steel Constructions like a one-two punch to the gut. The debt burden here is substantial. Even worse, Intracom Constructions Societe Anonyme Technical and Steel Constructions saw its EBIT tank 60% over the last 12 months. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Intracom Constructions Societe Anonyme Technical and Steel Constructions 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Intracom Constructions Societe Anonyme Technical and Steel Constructions burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

On the face of it, Intracom Constructions Societe Anonyme Technical and Steel Constructions's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. And furthermore, its net debt to EBITDA also fails to instill confidence. Considering all the factors previously mentioned, we think that Intracom Constructions Societe Anonyme Technical and Steel Constructions really is carrying too much debt. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. 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 1 warning sign for Intracom Constructions Societe Anonyme Technical and Steel Constructions you should be aware of.

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.

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