Would CFI Holding (WSE:CFI) Be Better Off With Less Debt?

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.' 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. Importantly, CFI Holding S.A. (WSE:CFI) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. 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

How Much Debt Does CFI Holding Carry?

The chart below, which you can click on for greater detail, shows that CFI Holding had zł324.1m in debt in September 2021; about the same as the year before. On the flip side, it has zł8.13m in cash leading to net debt of about zł315.9m.

A Look At CFI Holding's Liabilities

We can see from the most recent balance sheet that CFI Holding had liabilities of zł139.7m falling due within a year, and liabilities of zł460.1m due beyond that. Offsetting these obligations, it had cash of zł8.13m as well as receivables valued at zł31.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł559.9m.

This is a mountain of leverage relative to its market capitalization of zł707.0m. 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 you can't view debt in total isolation; since CFI Holding will need earnings to service that debt. 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 had a loss before interest and tax, and actually shrunk its revenue by 9.1%, to zł138m. We would much prefer see growth.

Caveat Emptor

Importantly, CFI Holding had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost zł9.6m 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. We would feel better if it turned its trailing twelve month loss of zł186m into a profit. So to be blunt we do think it is risky. 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. For instance, we've identified 2 warning signs for CFI Holding (1 doesn't sit too well with us) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.