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Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ 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 Compagnie du Cambodge (EPA:CBDG) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Compagnie du Cambodge Carry?
As you can see below, at the end of December 2018, Compagnie du Cambodge had €36.1m of debt, up from €30.6m a year ago. Click the image for more detail. However, it does have €1.66b in cash offsetting this, leading to net cash of €1.63b.
A Look At Compagnie du Cambodge’s Liabilities
Zooming in on the latest balance sheet data, we can see that Compagnie du Cambodge had liabilities of €92.5m due within 12 months and liabilities of €11.9m due beyond that. Offsetting this, it had €1.66b in cash and €11.5m in receivables that were due within 12 months. So it can boast €1.57b more liquid assets than total liabilities.
This luscious liquidity implies that Compagnie du Cambodge’s balance sheet is sturdy like a giant sequoia tree. On this view, it seems its balance sheet is as strong as a black-belt karate master. Simply put, the fact that Compagnie du Cambodge has more cash than debt is arguably a good indication that it can manage its debt safely.
Although Compagnie du Cambodge made a loss at the EBIT level, last year, it was also good to see that it generated €200k in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Compagnie du Cambodge’s earnings that will influence how the balance sheet holds up in the future. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Compagnie du Cambodge may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Compagnie du Cambodge saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While it is always sensible to investigate a company’s debt, in this case Compagnie du Cambodge has €1.6b in net cash and a decent-looking balance sheet. So we are not troubled with Compagnie du Cambodge’s debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you’ve also come to that realization, you’re in luck, because today you can view this interactive graph of Compagnie du Cambodge’s earnings per share history for free.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.