Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, CFI Holding S.A. (WSE:CFI) 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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for CFI Holding
What Is CFI Holding's Debt?
The image below, which you can click on for greater detail, shows that CFI Holding had debt of zł317.0m at the end of March 2022, a reduction from zł336.3m over a year. However, it does have zł8.26m in cash offsetting this, leading to net debt of about zł308.7m.
A Look At CFI Holding's Liabilities
We can see from the most recent balance sheet that CFI Holding had liabilities of zł166.3m falling due within a year, and liabilities of zł506.3m due beyond that. Offsetting this, it had zł8.26m in cash and zł44.7m in receivables that were due within 12 months. So it has liabilities totalling zł619.6m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of zł770.2m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CFI Holding's earnings that will influence how the balance sheet holds up in the future. 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.
In the last year CFI Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to zł164m. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
While we can certainly appreciate CFI Holding's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping zł235m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of zł247m into a profit. So in short it's a really risky stock. 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. For example CFI Holding has 2 warning signs (and 1 which is significant) we think 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.
About WSE:CFI
Proven track record with imperfect balance sheet.
