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.’ 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 can see that Centogene N.V. (NASDAQ:CNTG) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Centogene’s Debt?
As you can see below, Centogene had €3.94m of debt at September 2021, down from €5.12m a year prior. However, its balance sheet shows it holds €25.7m in cash, so it actually has €21.8m net cash.
How Strong Is Centogene’s Balance Sheet?
The latest balance sheet data shows that Centogene had liabilities of €34.7m due within a year, and liabilities of €24.1m falling due after that. Offsetting these obligations, it had cash of €25.7m as well as receivables valued at €16.3m due within 12 months. So it has liabilities totalling €16.8m more than its cash and near-term receivables, combined.
Since publicly traded Centogene shares are worth a total of €107.9m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Centogene boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Centogene’s ability to maintain a healthy balance sheet going forward.
Over 12 months, Centogene reported revenue of €217m, which is a gain of 196%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Centogene?
Although Centogene had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €2.6m. So although it is loss-making, it doesn’t seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for Centogene shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn’t change our opinion that the stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt.
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