Is Centogene (NASDAQ:CNTG) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Centogene N.V. (NASDAQ:CNTG) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Centogene

What Is Centogene's Net Debt?

As you can see below, Centogene had €4.30m of debt at March 2021, down from €4.62m a year prior. But on the other hand it also has €45.2m in cash, leading to a €40.9m net cash position.

How Strong Is Centogene's Balance Sheet?

We can see from the most recent balance sheet that Centogene had liabilities of €56.3m falling due within a year, and liabilities of €26.1m due beyond that. Offsetting these obligations, it had cash of €45.2m as well as receivables valued at €31.8m due within 12 months. So it has liabilities totalling €5.37m more than its cash and near-term receivables, combined.

Of course, Centogene has a market capitalization of €209.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Centogene boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Centogene's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Centogene reported revenue of €181m, which is a gain of 261%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Centogene?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Centogene had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €5.1m of cash and made a loss of €18m. But at least it has €40.9m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Centogene has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Centogene you should be aware of, and 1 of them makes us a bit uncomfortable.

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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