Is Compa (BVB:CMP) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Compa S.A. (BVB:CMP) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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.

Check out our latest analysis for Compa

How Much Debt Does Compa Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Compa had RON112.5m of debt, an increase on RON101.0m, over one year. However, it does have RON2.65m in cash offsetting this, leading to net debt of about RON109.8m.

How Strong Is Compa's Balance Sheet?

According to the last reported balance sheet, Compa had liabilities of RON111.0m due within 12 months, and liabilities of RON134.8m due beyond 12 months. Offsetting this, it had RON2.65m in cash and RON131.8m in receivables that were due within 12 months. So it has liabilities totalling RON111.3m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of RON135.3m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Compa 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, Compa made a loss at the EBIT level, and saw its revenue drop to RON542m, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

While Compa's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RON14m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RON24m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 4 warning signs for Compa you should be aware of, and 1 of them is potentially serious.

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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