Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We notice that Italia Independent Group SpA (BIT: IIG) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest analysis for Italia Independent Group
What is the debt of the Italia Independent Group?
You can click on the graph below for the historical figures, but it shows that in June 2021, Italia Independent Group had 17.7 million euros in debt, an increase from 13.4 million euros , over one year. However, due to the fact that it has a cash reserve of 495.7 K €, its net debt is lower, at around 17.2 M €.
How healthy is the Italy Independent Group balance sheet?
The most recent balance sheet shows that Italia Independent Group had debts of 10.2 million euros due within one year and debts of 15.6 million euros due beyond. In return, he had 495.7 K € in cash and 15.8 M € in receivables due within 12 months. It therefore has a total liability of € 9.49 million more than its combined cash and short-term receivables.
While that might sound like a lot, it’s not so bad since Italia Independent Group has a market capitalization of € 21.0m, so it could likely strengthen its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay your debt. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in isolation; since Italia Independent Group will need profits to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Last year, Italia Independent Group was not profitable in terms of EBIT, but managed to increase its turnover by 176%, to 14 million euros. Its fairly obvious shareholders are therefore hoping for more growth!
Despite the growth in turnover, Italia Independent Group still recorded a loss of profit before interest and taxes (EBIT) during the last year. Indeed, it lost 900 K € at the EBIT level. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. We therefore believe that its record is a bit strained, but not irreparable. However, it doesn’t help that he spent € 9.1million in cash in the past year. In short, it’s a really risky title. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Note that Italia Independent Group displays 3 warning signs in our investment analysis , and 1 of them is a bit disturbing …
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.