Does CPI Computer Peripherals International (ATH: CPI) Use Too Much Debt?

David Eben put it well when he said: “Volatility is not a risk we care about. What we care about is avoiding permanent loss of capital. So smart money seems to know that debt – which usually goes into bankruptcy – is a very important factor, when evaluating the extent of The seriousness of the company. We can see that CPI Computer Peripherals International (ATH: CPI) She uses debt in her business. But the real question is whether this debt makes the company too risky.

Why does debt bring risks?

Generally, debt becomes a real problem only when the company cannot pay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its statutory debt-repayment obligations, the shareholders can give up anything. However, the more frequent (but still costly) occurrence is where a company must issue shares at bargain low prices, permanently weakening shareholders, just to prop up its balance sheet. Of course, a lot of companies use debt to finance growth, without any negative consequences. The first step when looking at a company’s debt levels is to consider both liquidity and debt.

See our latest analysis for CPI Computer Peripherals International

How much debt does CPI Computer Peripherals International have?

As you can see below, at the end of June 2021, CPI Computer Peripherals International had a debt of €2.55 million, up from €2.15 million last year. Click on the image for more details. However, since it has a cash reserve of 340.6 thousand euros, its net debt is lower, at around 2.21 million euros.

ATSE: CPI Debt to Equity History November 27, 2021

A look at CPI Computer Peripherals International’s commitments

According to the last reported balance sheet, CPI Computer Peripherals International had liabilities of €4.88 million due within 12 months, and liabilities of €1.40 million due 12 months later. Instead, she had 340.6 thousand euros in cash and 3.15 million euros in receivables that were due within 12 months. Therefore, its liabilities exceed the sum of cash and receivables (short-term) by €2.79 million.

CPI Computer Peripherals International has a market capitalization of €6.74 million, so it is highly likely that it will raise cash to improve its balance sheet, should the need arise. However, it is still worth taking a closer look at their ability to pay off debt.

We measure a company’s debt burden relative to the strength of its earnings by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and by calculating how easily its EBIT is covered by its interest expense (interest cover). Thus we consider debt in relation to earnings with and without depreciation and amortization expenses.

While CPI Computer Peripherals International’s debt-to-EBITDA ratio (4.5) indicates that it is using some debt, its interest cover is very weak, at 2.2, indicating high leverage. So perhaps shareholders should realize that interest expense has already affected the business recently. The silver lining, however, was that CPI Computer Peripherals International had posted positive EBIT of €280,000 in the past twelve months, an improvement over the previous year’s loss. There is no doubt that we learn more about debt from the balance sheet. But it is CPI Computer Peripherals International’s earnings that will affect how the balance sheet continues into the future. So if you are keen to find out more about its earnings, it may be worth checking out this chart of its long-term earnings trend.

Finally, the company needs free cash flow to pay off debt; Accounting profits just don’t cut it. So it’s worth checking how much EBIT is backed by free cash flow. Looking at the last year, CPI Computer Peripherals International actually recorded a cash outflow, overall. Debt is much more risky for companies with unreliable free cash flow, so shareholders should hope that past expenditures will lead to free cash flow in the future.

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On the face of it, we left CPI Computer Peripherals International’s interest cap on hold on the stock, and turning it from EBIT into free cash flow couldn’t be more tempting than an empty restaurant on the busiest night of the year. Having said that, its ability to increase its EBIT is not a concern. Overall, we think it’s fair to say that CPI Computer Peripherals International has enough debt and that there are some real risks around the balance sheet. If all goes well, it may pay off but the downside of this debt is a greater risk of permanent losses. Obviously, the balance sheet is the area to focus on when analyzing debt. But in the end, every company can have off-balance sheet risks. For example, we discovered 3 Warning Signs for CPI Computer Peripherals International (2 are potentially dangerous!) You should be aware of them before investing here.

Of course, if you are the type of investor who prefers buying stocks without the burden of debt, feel free to discover our exclusive list of net cash growth today.

This article by Simply Wall St is general in nature. We provide comments based only on historical data and analyst expectations using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, nor does it take into account your objectives or financial situation. We aim to provide you with focused, long-term analysis driven by essential data. Note that our analysis may not include the company’s most recent price-sensitive ads or quality materials. Wall Street simply has no position in any of the stocks mentioned.

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