Is Intracom Constructions Societe Anonyme Technical and Steel Constructions (ATH:INKAT) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Intracom Constructions Societe Anonyme Technical and Steel Constructions (ATH:INKAT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at 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, at the end of June 2022, Intracom Constructions Societe Anonyme Technical and Steel Constructions had €134.8m of debt, up from €107.9m a year ago. Click the image for more detail. On the flip side, it has €29.2m in cash leading to net debt of about €105.6m.

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

The latest balance sheet data shows that Intracom Constructions Societe Anonyme Technical and Steel Constructions had liabilities of €221.1m due within a year, and liabilities of €114.2m falling due after that. On the other hand, it had cash of €29.2m and €165.5m worth of receivables due within a year. So its liabilities total €140.5m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of €120.3m, we think shareholders really should watch Intracom Constructions Societe Anonyme Technical and Steel Constructions's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Intracom Constructions Societe Anonyme Technical and Steel Constructions can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Intracom Constructions Societe Anonyme Technical and Steel Constructions wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to €231m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Intracom Constructions Societe Anonyme Technical and Steel Constructions still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €13m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of €48m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Intracom Constructions Societe Anonyme Technical and Steel Constructions (at least 2 which are concerning) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.