Is CPD (WSE:CPD) Using Debt In A Risky Way?

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.' 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, CPD S.A. (WSE:CPD) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CPD

What Is CPD's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 CPD had zł101.3m of debt, an increase on zł67.0m, over one year. But on the other hand it also has zł143.2m in cash, leading to a zł41.9m net cash position.

How Strong Is CPD's Balance Sheet?

The latest balance sheet data shows that CPD had liabilities of zł144.6m due within a year, and liabilities of zł26.3m falling due after that. Offsetting this, it had zł143.2m in cash and zł5.94m in receivables that were due within 12 months. So it has liabilities totalling zł21.7m more than its cash and near-term receivables, combined.

Since publicly traded CPD shares are worth a total of zł127.2m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, CPD boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CPD 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.

Over 12 months, CPD made a loss at the EBIT level, and saw its revenue drop to zł16m, which is a fall of 67%. To be frank that doesn't bode well.

So How Risky Is CPD?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months CPD lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of zł47m and booked a zł16m accounting loss. With only zł41.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for CPD (of which 1 makes us a bit uncomfortable!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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