Iktinos Hellas Greek Marble Industry Technical and Touristic (ATH:IKTIN) Use Of Debt Could Be Considered Risky

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Iktinos Hellas S.A. Greek Marble Industry Technical and Touristic Company (ATH:IKTIN) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Iktinos Hellas Greek Marble Industry Technical and Touristic

What Is Iktinos Hellas Greek Marble Industry Technical and Touristic's Debt?

As you can see below, Iktinos Hellas Greek Marble Industry Technical and Touristic had €44.4m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have €1.69m in cash offsetting this, leading to net debt of about €42.7m.

A Look At Iktinos Hellas Greek Marble Industry Technical and Touristic's Liabilities

The latest balance sheet data shows that Iktinos Hellas Greek Marble Industry Technical and Touristic had liabilities of €41.1m due within a year, and liabilities of €31.8m falling due after that. Offsetting these obligations, it had cash of €1.69m as well as receivables valued at €13.8m due within 12 months. So its liabilities total €57.4m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €68.3m, so it does suggest shareholders should keep an eye on Iktinos Hellas Greek Marble Industry Technical and Touristic's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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.

Iktinos Hellas Greek Marble Industry Technical and Touristic shareholders face the double whammy of a high net debt to EBITDA ratio (7.7), and fairly weak interest coverage, since EBIT is just 1.0 times the interest expense. The debt burden here is substantial. Worse, Iktinos Hellas Greek Marble Industry Technical and Touristic's EBIT was down 60% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Iktinos Hellas Greek Marble Industry Technical and Touristic'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Iktinos Hellas Greek Marble Industry Technical and Touristic reported free cash flow worth 16% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

On the face of it, Iktinos Hellas Greek Marble Industry Technical and Touristic's interest cover 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 even its conversion of EBIT to free cash flow fails to inspire much confidence. Taking into account all the aforementioned factors, it looks like Iktinos Hellas Greek Marble Industry Technical and Touristic has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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. Be aware that Iktinos Hellas Greek Marble Industry Technical and Touristic is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...

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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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.