Is Cabka (AMS:CABKA) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Cabka N.V. (AMS:CABKA) does carry debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Cabka Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Cabka had €62.0m of debt, an increase on €48.7m, over one year. However, because it has a cash reserve of €4.39m, its net debt is less, at about €57.6m.

How Healthy Is Cabka's Balance Sheet?

According to the last reported balance sheet, Cabka had liabilities of €77.4m due within 12 months, and liabilities of €39.4m due beyond 12 months. Offsetting these obligations, it had cash of €4.39m as well as receivables valued at €25.9m due within 12 months. So its liabilities total €86.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €48.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Cabka would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cabka can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

View our latest analysis for Cabka

Over 12 months, Cabka made a loss at the EBIT level, and saw its revenue drop to €189m, which is a fall of 6.4%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Cabka produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €1.7m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of €2.3m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Cabka you should know about.

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.