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. 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 Kordellos Ch. Bros S.A. (ATH:KORDE) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Kordellos Ch. Bros
What Is Kordellos Ch. Bros's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Kordellos Ch. Bros had €28.8m of debt in December 2018, down from €32.6m, one year before. On the flip side, it has €2.26m in cash leading to net debt of about €26.5m.
How Healthy Is Kordellos Ch. Bros's Balance Sheet?
According to the last reported balance sheet, Kordellos Ch. Bros had liabilities of €31.4m due within 12 months, and liabilities of €3.80m due beyond 12 months. Offsetting this, it had €2.26m in cash and €17.9m in receivables that were due within 12 months. So its liabilities total €15.0m more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company's market capitalization of €11.0m, we think shareholders really should watch Kordellos Ch. Bros's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.
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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.