Kiriacoulis Mediterranean Cruises Shipping (ATH:KYRI) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Kiriacoulis Mediterranean Cruises Shipping SA (ATH:KYRI) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kiriacoulis Mediterranean Cruises Shipping

How Much Debt Does Kiriacoulis Mediterranean Cruises Shipping Carry?

The image below, which you can click on for greater detail, shows that at June 2020 Kiriacoulis Mediterranean Cruises Shipping had debt of €7.65m, up from €3.61m in one year. However, it does have €1.50m in cash offsetting this, leading to net debt of about €6.15m.

How Healthy Is Kiriacoulis Mediterranean Cruises Shipping's Balance Sheet?

The latest balance sheet data shows that Kiriacoulis Mediterranean Cruises Shipping had liabilities of €18.9m due within a year, and liabilities of €20.3m falling due after that. Offsetting these obligations, it had cash of €1.50m as well as receivables valued at €21.0m due within 12 months. So it has liabilities totalling €16.7m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €9.08m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Kiriacoulis Mediterranean Cruises Shipping would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kiriacoulis Mediterranean Cruises Shipping'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.

Over 12 months, Kiriacoulis Mediterranean Cruises Shipping made a loss at the EBIT level, and saw its revenue drop to €26m, which is a fall of 30%. That makes us nervous, to say the least.

Caveat Emptor

While Kiriacoulis Mediterranean Cruises Shipping's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping €3.5m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of €3.9m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Kiriacoulis Mediterranean Cruises Shipping you should be aware of, and 1 of them is concerning.

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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