Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We can see that Ober SA (EPA:ALOBR) uses debt in its business. But the more important question is: what risk does this debt create?
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Ober
What is Ober’s Net Debt?
As you can see below, Ober had 11.3 million euros in debt in December 2021, compared to 12.8 million euros the previous year. On the other hand, he has €5.20 million in cash, resulting in a net debt of around €6.13 million.
How strong is Ober’s balance sheet?
The latest balance sheet data shows Ober had liabilities of €3.75 million due within a year, and liabilities of €16.5 million falling due thereafter. In return, it had €5.20 million in cash and €6.78 million in receivables due within 12 months. It therefore has liabilities totaling 8.26 million euros more than its cash and short-term receivables, combined.
This deficit is considerable compared to its market capitalization of 11.6 million euros, so he suggests that shareholders monitor Ober’s use of debt. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Ober’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, Ober was not profitable in terms of EBIT, but managed to increase its turnover by 16%, to 33 million euros. This rate of growth is a bit slow for our liking, but it takes all types to make a world.
Over the last twelve months, Ober has recorded a loss of earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to €206,000. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. So we think its balance sheet is a little stretched, but not beyond repair. However, it doesn’t help that he burned €4.5m in cash in the last year. So suffice it to say that we consider the stock to be very risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 1 warning sign for Ober you should be aware.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.