Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Doppler S.A. (ATH:DOPPLER) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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.
Check out our latest analysis for Doppler
What Is Doppler's Debt?
The image below, which you can click on for greater detail, shows that Doppler had debt of €14.6m at the end of December 2018, a reduction from €16.8m over a year. However, it also had €341.7k in cash, and so its net debt is €14.3m.
How Healthy Is Doppler's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Doppler had liabilities of €12.9m due within 12 months and liabilities of €8.86m due beyond that. Offsetting these obligations, it had cash of €341.7k as well as receivables valued at €9.77m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €11.6m.
This deficit casts a shadow over the €3.29m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Doppler would probably need a major re-capitalization if its creditors were to demand repayment.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.