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. 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 can see that CS Communication & Systemes SA (EPA:SX) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for CS Communication & Systemes
What Is CS Communication & Systemes's Debt?
You can click the graphic below for the historical numbers, but it shows that CS Communication & Systemes had €48.7m of debt in June 2019, down from €98.8m, one year before. However, it does have €28.3m in cash offsetting this, leading to net debt of about €20.4m.
How Healthy Is CS Communication & Systemes's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that CS Communication & Systemes had liabilities of €177.2m due within 12 months and liabilities of -€92.0m due beyond that. Offsetting this, it had €28.3m in cash and €10.4m in receivables that were due within 12 months. So its liabilities total €46.5m more than the combination of its cash and short-term receivables.
CS Communication & Systemes has a market capitalization of €102.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
CS Communication & Systemes has net debt worth 1.5 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 3.3 times the interest expense. While these numbers do not alarm us, it's worth noting that the cost of the company's debt is having a real impact. Importantly, CS Communication & Systemes grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine CS Communication & Systemes's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.