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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, elumeo SE (ETR:ELB) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for elumeo

How Much Debt Does elumeo Carry?

You can click the graphic below for the historical numbers, but it shows that elumeo had €1.72m of debt in March 2019, down from €13.5m, one year before. On the flip side, it has €1.70m in cash leading to net debt of about €24.0k.

How Healthy Is elumeo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that elumeo had liabilities of €13.0m due within 12 months and liabilities of €11.0m due beyond that. Offsetting these obligations, it had cash of €1.70m as well as receivables valued at €689.0k due within 12 months. So it has liabilities totalling €21.6m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €5.56m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, elumeo would likely require a major re-capitalisation if it had to pay its creditors today. elumeo has a very little net debt but plenty of other liabilities weighing it down. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if elumeo 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, elumeo saw its revenue drop to €46m, which is a fall of 33%. That makes us nervous, to say the least.

Caveat Emptor

Not only did elumeo's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable €16m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized €110k in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how elumeo's profit, revenue, and operating cashflow have changed over the last few years.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.