Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Intrakat Société Anonyme Technical and Energy Projects (ATH:INKAT) does carry debt. But the more important question is: how much risk is that debt creating?
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. 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.
What Is Intrakat Société Anonyme Technical and Energy Projects's Debt?
As you can see below, at the end of June 2023, Intrakat Société Anonyme Technical and Energy Projects had €154.2m of debt, up from €134.8m a year ago. Click the image for more detail. However, because it has a cash reserve of €60.5m, its net debt is less, at about €93.7m.
How Healthy Is Intrakat Société Anonyme Technical and Energy Projects' Balance Sheet?
The latest balance sheet data shows that Intrakat Société Anonyme Technical and Energy Projects had liabilities of €263.3m due within a year, and liabilities of €136.8m falling due after that. Offsetting these obligations, it had cash of €60.5m as well as receivables valued at €167.4m due within 12 months. So its liabilities total €172.2m more than the combination of its cash and short-term receivables.
Intrakat Société Anonyme Technical and Energy Projects has a market capitalization of €609.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without 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.
Intrakat Société Anonyme Technical and Energy Projects has net debt worth 2.3 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 2.6 times the interest expense. While these numbers do not alarm us, it's worth noting that the cost of the company's debt is having a real impact. We also note that Intrakat Société Anonyme Technical and Energy Projects improved its EBIT from a last year's loss to a positive €34m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Intrakat Société Anonyme Technical and Energy Projects 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Intrakat Société Anonyme Technical and Energy Projects saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
We'd go so far as to say Intrakat Société Anonyme Technical and Energy Projects's conversion of EBIT to free cash flow was disappointing. But at least its level of total liabilities is not so bad. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Intrakat Société Anonyme Technical and Energy Projects stock a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 3 warning signs for Intrakat Société Anonyme Technical and Energy Projects 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.
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Intrakat Société Anonyme Technical and Energy Projects
Intrakat Société Anonyme Technical and Energy Projects engages in the construction business in Greece, European countries, and internationally.
Mediocre balance sheet with questionable track record.