Is Summa Linguae (WSE:SUL) Using Too Much 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Summa Linguae S.A. (WSE:SUL) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Summa Linguae

What Is Summa Linguae's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Summa Linguae had debt of zł8.47m, up from zł3.66m in one year. But on the other hand it also has zł21.8m in cash, leading to a zł13.3m net cash position.

A Look At Summa Linguae's Liabilities

According to the last reported balance sheet, Summa Linguae had liabilities of zł19.6m due within 12 months, and liabilities of zł6.59m due beyond 12 months. Offsetting these obligations, it had cash of zł21.8m as well as receivables valued at zł17.7m due within 12 months. So it actually has zł13.3m more liquid assets than total liabilities.

This surplus suggests that Summa Linguae has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Summa Linguae boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Summa Linguae 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, Summa Linguae reported revenue of zł95m, which is a gain of 9.5%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Summa Linguae?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Summa Linguae had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through zł2.8m of cash and made a loss of zł874k. With only zł13.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 2 warning signs for Summa Linguae that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.