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These 4 Measures Indicate That Catering International & Services Société Anonyme (EPA:CTRG) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Catering International & Services Société Anonyme (EPA:CTRG) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Catering International & Services Société Anonyme

What Is Catering International & Services Société Anonyme's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 Catering International & Services Société Anonyme had €27.0m of debt, an increase on €17.9m, over one year. However, its balance sheet shows it holds €44.5m in cash, so it actually has €17.5m net cash.

ENXTPA:CTRG Historical Debt, February 29th 2020
ENXTPA:CTRG Historical Debt, February 29th 2020

How Healthy Is Catering International & Services Société Anonyme's Balance Sheet?

The latest balance sheet data shows that Catering International & Services Société Anonyme had liabilities of €80.8m due within a year, and liabilities of €26.0m falling due after that. On the other hand, it had cash of €44.5m and €69.6m worth of receivables due within a year. So it actually has €7.30m more liquid assets than total liabilities.

This surplus suggests that Catering International & Services Société Anonyme has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Catering International & Services Société Anonyme boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Catering International & Services Société Anonyme's saving grace is its low debt levels, because its EBIT has tanked 22% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Catering International & Services Société Anonyme can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Catering International & Services Société Anonyme has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Catering International & Services Société Anonyme recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Catering International & Services Société Anonyme has net cash of €17.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in €3.3m. So we are not troubled with Catering International & Services Société Anonyme's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Catering International & Services Société Anonyme has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.