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 General Commercial & Industrial S.A. (ATH:GEBKA) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for General Commercial & Industrial
What Is General Commercial & Industrial's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 General Commercial & Industrial had €4.20m of debt, an increase on €2.71m, over one year. However, it also had €843.2k in cash, and so its net debt is €3.36m.
A Look At General Commercial & Industrial's Liabilities
The latest balance sheet data shows that General Commercial & Industrial had liabilities of €7.92m due within a year, and liabilities of €3.43m falling due after that. Offsetting these obligations, it had cash of €843.2k as well as receivables valued at €9.66m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €841.5k.
Given General Commercial & Industrial has a market capitalization of €19.7m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.