Is CFI Holding (WSE:CFI) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that CFI Holding S.A. (WSE:CFI) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CFI Holding

What Is CFI Holding's Net Debt?

As you can see below, at the end of September 2020, CFI Holding had zł323.5m of debt, up from zł307.7m a year ago. Click the image for more detail. However, it also had zł159.3m in cash, and so its net debt is zł164.3m.

How Strong Is CFI Holding's Balance Sheet?

According to the last reported balance sheet, CFI Holding had liabilities of zł115.2m due within 12 months, and liabilities of zł484.3m due beyond 12 months. Offsetting these obligations, it had cash of zł159.3m as well as receivables valued at zł39.4m due within 12 months. So its liabilities total zł400.8m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because CFI Holding is worth zł753.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Over 12 months, CFI Holding made a loss at the EBIT level, and saw its revenue drop to zł133m, which is a fall of 22%. To be frank that doesn't bode well.

Caveat Emptor

Not only did CFI Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at zł4.4m. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of zł54m and the profit of zł30m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - CFI Holding has 3 warning signs (and 1 which can't be ignored) 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. 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.
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