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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, CPI Computer Peripherals International (ATH:CPI) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
See our latest analysis for CPI Computer Peripherals International
What Is CPI Computer Peripherals International's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 CPI Computer Peripherals International had €2.12m of debt, an increase on €1.83m, over one year. However, it also had €245.2k in cash, and so its net debt is €1.87m.
A Look At CPI Computer Peripherals International's Liabilities
According to the last reported balance sheet, CPI Computer Peripherals International had liabilities of €6.25m due within 12 months, and liabilities of €100.7k due beyond 12 months. Offsetting these obligations, it had cash of €245.2k as well as receivables valued at €3.52m due within 12 months. So it has liabilities totalling €2.58m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of €2.77m. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
CPI Computer Peripherals International shareholders face the double whammy of a high net debt to EBITDA ratio (6.4), and fairly weak interest coverage, since EBIT is just 1.1 times the interest expense. This means we'd consider it to have a heavy debt load. The good news is that CPI Computer Peripherals International grew its EBIT a smooth 79% over the last twelve months. Like the milk of human kindness that sort of growth increases resilience, making the company more capable of managing debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CPI Computer Peripherals International 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.