Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Biokarpet S.A. (ATH:BIOKA) makes use of debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
View our latest analysis for Biokarpet
How Much Debt Does Biokarpet Carry?
The chart below, which you can click on for greater detail, shows that Biokarpet had €74.5m in debt in December 2018; about the same as the year before. However, it also had €3.13m in cash, and so its net debt is €71.3m.
How Strong Is Biokarpet's Balance Sheet?
According to the last reported balance sheet, Biokarpet had liabilities of €34.5m due within 12 months, and liabilities of €60.7m due beyond 12 months. Offsetting these obligations, it had cash of €3.13m as well as receivables valued at €32.0m due within 12 months. So it has liabilities totalling €60.1m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the €19.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Biokarpet would probably need a major re-capitalization if its creditors were to demand repayment.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Weak interest cover of 1.3 times and a disturbingly high net debt to EBITDA ratio of 10.4 hit our confidence in Biokarpet like a one-two punch to the gut. The debt burden here is substantial. Looking on the bright side, Biokarpet boosted its EBIT by a silky 95% in the last year. Like a mother's loving embrace of a newborn that sort of growth builds resilience, putting the company in a stronger position to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Biokarpet's earnings that will influence how the balance sheet holds up in the future. 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.