Is Iktinos Hellas Greek Marble Industry Technical and Touristic (ATH:IKTIN) A Risky Investment?

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 note that Iktinos Hellas S.A. Greek Marble Industry Technical and Touristic Company (ATH:IKTIN) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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, 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.

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

How Much Debt Does Iktinos Hellas Greek Marble Industry Technical and Touristic Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Iktinos Hellas Greek Marble Industry Technical and Touristic had debt of €43.3m, up from €39.4m in one year. On the flip side, it has €3.43m in cash leading to net debt of about €39.9m.

How Strong Is Iktinos Hellas Greek Marble Industry Technical and Touristic's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Iktinos Hellas Greek Marble Industry Technical and Touristic had liabilities of €39.9m due within 12 months and liabilities of €35.2m due beyond that. Offsetting these obligations, it had cash of €3.43m as well as receivables valued at €10.1m due within 12 months. So it has liabilities totalling €61.5m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €95.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Iktinos Hellas Greek Marble Industry Technical and Touristic's debt is 4.5 times its EBITDA, and its EBIT cover its interest expense 2.6 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Even worse, Iktinos Hellas Greek Marble Industry Technical and Touristic saw its EBIT tank 42% over the last 12 months. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Iktinos Hellas Greek Marble Industry Technical and Touristic recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

To be frank both Iktinos Hellas Greek Marble Industry Technical and Touristic's conversion of EBIT to free cash flow and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. And furthermore, its net debt to EBITDA also fails to instill confidence. Overall, it seems to us that Iktinos Hellas Greek Marble Industry Technical and Touristic's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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 5 warning signs for Iktinos Hellas Greek Marble Industry Technical and Touristic you should be aware of, and 1 of them is significant.

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.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.