Clabo (BIT:CLA) seems to use a lot of debt
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 “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Clabo SpA (BIT:CLA) uses debt. But should shareholders worry about its use of debt?
When is debt a problem?
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. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Clabo
What is Clabo’s net debt?
The chart below, which you can click on for more details, shows that Clabo had €37.5m in debt as of December 2021; about the same as the previous year. However, he has €2.08m in cash to offset this, resulting in a net debt of around €35.4m.
How healthy is Clabo’s balance sheet?
According to the last published balance sheet, Clabo had liabilities of 38.2 million euros at less than 12 months and liabilities of 36.4 million euros at more than 12 months. In return for these bonds, it had cash of €2.08 million as well as receivables worth €12.7 million maturing in less than 12 months. Its liabilities therefore total €59.8 million more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the 24.6 million euro enterprise itself, like a child struggling under the weight of a huge backpack full of books, his sports equipment and a trumpet. We would therefore be watching his balance sheet closely, no doubt. Ultimately, Clabo would likely need a major recapitalization if its creditors were to demand repayment.
We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
Low interest coverage of 0.22x and an extremely high net debt to EBITDA ratio of 11.6 hit our confidence in Clabo like a punch in the gut. The debt burden here is considerable. However, the silver lining was that Clabo achieved a positive EBIT of €536,000 in the last twelve months, an improvement on the loss the previous year. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since Clabo will need income to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Finally, a company can only repay its debts with cold hard cash, not with book profits. It is therefore worth checking how much of earnings before interest and tax (EBIT) is supported by free cash flow. Over the past year, Clabo has burned through a lot of cash. While this may be the result of spending for growth, it makes debt much riskier.
Our point of view
At first glance, Clabo’s conversion of EBIT to free cash flow left us hesitant about the stock, and its level of total liabilities was no more appealing than the single empty restaurant on the busiest night of the year. year. But at least its EBIT growth rate isn’t that bad. We think the chances of Clabo having too much debt are very high. For us, this means that the action is rather high risk, and probably to be avoided; but everyone has their own (investment) style. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 3 warning signs we spotted some with Clabo (including 1 that should not be overlooked).
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.