Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Domiki Kritis S.A. (ATH:DOMIK) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.
See our latest analysis for Domiki Kritis
What Is Domiki Kritis's Net Debt?
As you can see below, at the end of December 2018, Domiki Kritis had €7.02m of debt, up from €6.69m a year ago. Click the image for more detail. On the flip side, it has €1.46m in cash leading to net debt of about €5.57m.
A Look At Domiki Kritis's Liabilities
Zooming in on the latest balance sheet data, we can see that Domiki Kritis had liabilities of €8.35m due within 12 months and liabilities of €4.82m due beyond that. On the other hand, it had cash of €1.46m and €3.97m worth of receivables due within a year. So it has liabilities totalling €7.74m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the €2.76m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Domiki Kritis would likely require a major re-capitalisation if it had to pay its creditors today.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Domiki Kritis shareholders face the double whammy of a high net debt to EBITDA ratio (9.2), and fairly weak interest coverage, since EBIT is just 0.89 times the interest expense. The debt burden here is substantial. One redeeming factor for Domiki Kritis is that it turned last year's EBIT loss into a gain of €375k, over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Domiki Kritis's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.