Is Centric Holdings (ATH:CENTR) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Centric Holdings S.A. (ATH:CENTR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Centric Holdings

How Much Debt Does Centric Holdings Carry?

As you can see below, at the end of December 2020, Centric Holdings had €5.09m of debt, up from €2.40m a year ago. Click the image for more detail. However, it does have €24.8m in cash offsetting this, leading to net cash of €19.7m.

How Healthy Is Centric Holdings' Balance Sheet?

We can see from the most recent balance sheet that Centric Holdings had liabilities of €1.22m falling due within a year, and liabilities of €7.10m due beyond that. Offsetting these obligations, it had cash of €24.8m as well as receivables valued at €1.60m due within 12 months. So it actually has €18.1m more liquid assets than total liabilities.

This luscious liquidity implies that Centric Holdings' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Centric Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Centric Holdings'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.

In the last year Centric Holdings had a loss before interest and tax, and actually shrunk its revenue by 39%, to €2.6m. To be frank that doesn't bode well.

So How Risky Is Centric Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Centric Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €1.9m of cash and made a loss of €1.0m. Given it only has net cash of €19.7m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should be aware of the 2 warning signs we've spotted with Centric Holdings .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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