Would Cy4gate (BIT:CY4) Be Better Off With Less Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Cy4gate S.p.A. (BIT:CY4) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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, 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 Cy4gate

What Is Cy4gate's Net Debt?

As you can see below, at the end of September 2024, Cy4gate had €43.1m of debt, up from €25.5m a year ago. Click the image for more detail. On the flip side, it has €8.29m in cash leading to net debt of about €34.8m.

A Look At Cy4gate's Liabilities

The latest balance sheet data shows that Cy4gate had liabilities of €41.8m due within a year, and liabilities of €40.3m falling due after that. Offsetting this, it had €8.29m in cash and €57.3m in receivables that were due within 12 months. So it has liabilities totalling €16.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Cy4gate has a market capitalization of €82.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Cy4gate can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Cy4gate had a loss before interest and tax, and actually shrunk its revenue by 5.1%, to €71m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Cy4gate produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €6.0m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of €17m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Cy4gate .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.