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.' 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. Importantly, Clasquin SA (EPA:ALCLA) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Clasquin
What Is Clasquin's Debt?
The image below, which you can click on for greater detail, shows that at December 2018 Clasquin had debt of €39.1m, up from €32.8m in one year. However, because it has a cash reserve of €23.2m, its net debt is less, at about €15.9m.
How Healthy Is Clasquin's Balance Sheet?
The latest balance sheet data shows that Clasquin had liabilities of €97.4m due within a year, and liabilities of €18.3m falling due after that. Offsetting this, it had €23.2m in cash and €86.7m in receivables that were due within 12 months. So it has liabilities totalling €5.84m more than its cash and near-term receivables, combined.
Since publicly traded Clasquin shares are worth a total of €78.5m, 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.
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.
We'd say that Clasquin's moderate net debt to EBITDA ratio ( being 2.1), indicates prudence when it comes to debt. And its commanding EBIT of 31.0 times its interest expense, implies the debt load is as light as a peacock feather. One way Clasquin could vanquish its debt would be if it stops borrowing more but conitinues to grow EBIT at around 11%, as it did over the last year. 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 Clasquin'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.