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. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies De Raj Group AG (ETR:DRJ) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for De Raj Group
What Is De Raj Group's Debt?
The image below, which you can click on for greater detail, shows that De Raj Group had debt of €18.9m at the end of June 2019, a reduction from €21.6m over a year. And it doesn't have much cash, so its net debt is about the same.
A Look At De Raj Group's Liabilities
According to the last reported balance sheet, De Raj Group had liabilities of €11.3m due within 12 months, and liabilities of €13.2m due beyond 12 months. Offsetting these obligations, it had cash of €219.2k as well as receivables valued at €6.21m due within 12 months. So its liabilities total €18.0m more than the combination of its cash and short-term receivables.
Since publicly traded De Raj Group shares are worth a total of €93.1m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is De Raj Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, De Raj Group made a loss at the EBIT level, and saw its revenue drop to €9.2m, which is a fall of 26%. To be frank that doesn't bode well.