Is City Service (WSE:CTS) Using Too Much Debt?

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.' 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. We note that City Service SE (WSE:CTS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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. 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.

View our latest analysis for City Service

What Is City Service's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 City Service had €31.1m of debt, an increase on €19.8m, over one year. On the flip side, it has €6.86m in cash leading to net debt of about €24.2m.

A Look At City Service's Liabilities

Zooming in on the latest balance sheet data, we can see that City Service had liabilities of €64.2m due within 12 months and liabilities of €16.3m due beyond that. On the other hand, it had cash of €6.86m and €32.7m worth of receivables due within a year. So it has liabilities totalling €40.9m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €52.1m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since City Service will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, City Service made a loss at the EBIT level, and saw its revenue drop to €128m, which is a fall of 9.4%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months City Service produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable €6.1m 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. However, it doesn't help that it burned through €803k of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. For example, we've discovered 5 warning signs for City Service (4 are a bit unpleasant!) that you should be aware of before investing here.

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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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.