Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” 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. Mostly, Cliq Digital AG (ETR: CLIQ) is in debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Cliq Digital
How much debt does Cliq Digital carry?
You can click on the chart below for historical figures, but it shows Cliq Digital had €5.91 million in debt in September 2021, up from €9.87 million a year prior. But on the other hand, it also has 6.70 million euros in cash, which leads to a net cash of 794.2 k€.
A Look at Cliq Digital’s Responsibilities
We can see from the most recent balance sheet that Cliq Digital had liabilities of €25.2 million due in one year, and liabilities of €7.57 million due beyond. In return, it had €6.70 million in cash and €13.6 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €12.4 million.
Of course, Cliq Digital has a market capitalization of 130.4 million euros, so these liabilities are probably manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time. While it has liabilities worth noting, Cliq Digital also has more cash than debt, so we’re pretty confident it can manage its debt safely.
On top of that, we are happy to report that Cliq Digital increased its EBIT by 91%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Cliq Digital’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.
Finally, while the taxman may love accounting profits, lenders only accept cash. Cliq Digital may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its capacity. . to manage debt. Over the past three years, Cliq Digital has produced strong free cash flow equivalent to 75% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.
Abstract
We can understand that investors are worried about Cliq Digital’s liabilities, but we can be reassured by the fact that it has a net cash position of €794.2k. And we liked the look of EBIT growth of 91% YoY last year. We therefore do not believe that Cliq Digital’s use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 3 warning signs for Cliq Digital of which you should be aware.
If you are interested in investing in companies 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.
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