Here's Why I.Kloukinas-I.Lappas (ATH:KLM) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that I.Kloukinas-I.Lappas S.A. (ATH:KLM) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for I.Kloukinas-I.Lappas

How Much Debt Does I.Kloukinas-I.Lappas Carry?

As you can see below, I.Kloukinas-I.Lappas had €11.4m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of €533.6k, its net debt is less, at about €10.9m.

A Look At I.Kloukinas-I.Lappas' Liabilities

Zooming in on the latest balance sheet data, we can see that I.Kloukinas-I.Lappas had liabilities of €23.5m due within 12 months and liabilities of €10.7m due beyond that. On the other hand, it had cash of €533.6k and €338.8k worth of receivables due within a year. So its liabilities total €33.4m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €47.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is I.Kloukinas-I.Lappas's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year I.Kloukinas-I.Lappas wasn't profitable at an EBIT level, but managed to grow its revenue by 76%, to €27m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though I.Kloukinas-I.Lappas managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at €664k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of €2.9m into a profit. So in short it's a really risky stock. 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. Case in point: We've spotted 2 warning signs for I.Kloukinas-I.Lappas you should be aware of, and 1 of them doesn't sit too well with us.

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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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.