Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. We note that Ilyda SA (ATH:ILYDA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Ilyda
What Is Ilyda's Debt?
The image below, which you can click on for greater detail, shows that Ilyda had debt of €2.63m at the end of December 2018, a reduction from €2.96m over a year. On the flip side, it has €970.4k in cash leading to net debt of about €1.66m.
How Strong Is Ilyda's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Ilyda had liabilities of €1.14m due within 12 months and liabilities of €2.98m due beyond that. Offsetting these obligations, it had cash of €970.4k as well as receivables valued at €812.7k due within 12 months. So its liabilities total €2.34m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of €2.90m. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ilyda'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.
Over 12 months, Ilyda made a loss at the EBIT level, and saw its revenue drop to €2.2m, which is a fall of 2.5%. That's not what we would hope to see.