Does the municipal service (WSE:CTS) use too much debt?

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Municipal Service SE (WSE:CTS) has debt on its balance sheet. But the more important question is: what risk does this debt create?

Why is debt risky?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for City Service

What is the municipal service debt?

You can click on the graph below for historical figures, but it shows that in March 2022 City Service had 31.1 million euros in debt, an increase of 19.8 million euros, year on year . On the other hand, he has €6.86 million in cash, resulting in a net debt of around €24.2 million.

WSE: CTS Debt to Equity History as of July 30, 2022

A look at the responsibilities of the municipal service

Zooming in on the latest balance sheet data, we can see that City Service had liabilities of €64.2m due within 12 months and liabilities of €16.3m due beyond. On the other hand, it had €6.86 million in cash and €32.7 million in receivables at less than one year. It therefore has liabilities totaling 40.9 million euros more than its cash and short-term receivables, combined.

That’s a mountain of leverage compared to its market capitalization of €52.1m. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since City Service will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Over 12 months, City Service recorded a loss in terms of EBIT, and saw its turnover fall to €128 million, a decrease of 9.4%. We would much rather see growth.

Caveat Emptor

Over the last twelve months, City Service has recorded a loss of earnings before interest and taxes (EBIT). Indeed, it lost a very considerable 6.1 million euros in terms of EBIT. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has debt. So we think its balance sheet is a little stretched, but not beyond repair. However, it doesn’t help that he’s burned €803,000 in cash in the past year. So suffice it to say that we consider the stock to be risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we found 5 warning signs for City Service (4 are a little nasty!) that you should be aware of before investing here.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Julio V. Miller