Does Byte Computer (ATH:BYTE) Have A Healthy Balance Sheet?

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. As with many other companies Byte Computer S.A. (ATH:BYTE) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Byte Computer

How Much Debt Does Byte Computer Carry?

The chart below, which you can click on for greater detail, shows that Byte Computer had €6.21m in debt in December 2020; about the same as the year before. However, it does have €9.36m in cash offsetting this, leading to net cash of €3.15m.

How Strong Is Byte Computer's Balance Sheet?

We can see from the most recent balance sheet that Byte Computer had liabilities of €17.3m falling due within a year, and liabilities of €2.33m due beyond that. On the other hand, it had cash of €9.36m and €11.9m worth of receivables due within a year. So it can boast €1.60m more liquid assets than total liabilities.

This short term liquidity is a sign that Byte Computer could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Byte Computer has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Byte Computer has boosted its EBIT by 97%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Byte Computer will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Byte Computer has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Byte Computer actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Byte Computer has €3.15m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 135% of that EBIT to free cash flow, bringing in €3.9m. So we don't think Byte Computer's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Byte Computer , and understanding them should be part of your investment process.

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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