David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Intertech S.A. Inter. Technologies (ATH:INTET) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Intertech Inter. Technologies's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Intertech Inter. Technologies had €4.92m of debt, an increase on €3.16m, over one year. On the flip side, it has €2.38m in cash leading to net debt of about €2.54m.
How Healthy Is Intertech Inter. Technologies' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Intertech Inter. Technologies had liabilities of €6.21m due within 12 months and liabilities of €3.03m due beyond that. Offsetting this, it had €2.38m in cash and €5.51m in receivables that were due within 12 months. So its liabilities total €1.35m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Intertech Inter. Technologies has a market capitalization of €6.61m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Intertech Inter. Technologies 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.
Over 12 months, Intertech Inter. Technologies made a loss at the EBIT level, and saw its revenue drop to €19m, which is a fall of 11%. That's not what we would hope to see.
Not only did Intertech Inter. Technologies's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost €443k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of €262k into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Intertech Inter. Technologies you should be aware of, and 2 of them are 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.
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