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. We can see that ADThink Media Société Anonyme (EPA:ALADM) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ADThink Media Société Anonyme

How Much Debt Does ADThink Media Société Anonyme Carry?

You can click the graphic below for the historical numbers, but it shows that ADThink Media Société Anonyme had €1.86m of debt in December 2018, down from €3.88m, one year before. However, because it has a cash reserve of €1.39m, its net debt is less, at about €467.0k.

A Look At ADThink Media Société Anonyme's Liabilities

The latest balance sheet data shows that ADThink Media Société Anonyme had liabilities of €4.06m due within a year, and liabilities of €1.13m falling due after that. Offsetting this, it had €1.39m in cash and €7.91m in receivables that were due within 12 months. So it can boast €4.11m more liquid assets than total liabilities.

This surplus liquidity suggests that ADThink Media Société Anonyme's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ADThink Media Société Anonyme can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, ADThink Media Société Anonyme saw its revenue drop to €12m, which is a fall of 46%. That makes us nervous, to say the least.

Caveat Emptor

While ADThink Media Société Anonyme's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping €917k. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. For riskier companies like ADThink Media Société Anonyme I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.