Is Catena Media (STO:CTM) Using Too Much 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.' 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. As with many other companies Catena Media plc (STO:CTM) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Catena Media

What Is Catena Media's Debt?

You can click the graphic below for the historical numbers, but it shows that Catena Media had €31.3m of debt in September 2024, down from €59.6m, one year before. However, because it has a cash reserve of €11.7m, its net debt is less, at about €19.6m.

How Strong Is Catena Media's Balance Sheet?

According to the last reported balance sheet, Catena Media had liabilities of €23.5m due within 12 months, and liabilities of €10.4m due beyond 12 months. Offsetting these obligations, it had cash of €11.7m as well as receivables valued at €30.1m due within 12 months. So it actually has €7.85m more liquid assets than total liabilities.

This excess liquidity suggests that Catena Media is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Catena Media's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Catena Media had a loss before interest and tax, and actually shrunk its revenue by 38%, to €54m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Catena Media's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable €4.0m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. 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. We've identified 2 warning signs with Catena Media , and understanding them should be part of your investment process.

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.