Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Juventus Football Club S.p.A. (BIT:JUVE) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Juventus Football Club’s Net Debt?
As you can see below, at the end of December 2018, Juventus Football Club had €424.5m of debt, up from €355.9m a year ago. Click the image for more detail. On the flip side, it has €48.5m in cash leading to net debt of about €375.9m.
How Strong Is Juventus Football Club’s Balance Sheet?
The latest balance sheet data shows that Juventus Football Club had liabilities of €430.4m due within a year, and liabilities of €427.3m falling due after that. Offsetting these obligations, it had cash of €48.5m as well as receivables valued at €87.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €721.7m.
This deficit isn’t so bad because Juventus Football Club is worth €1.29b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Juventus Football Club 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.
In the last year Juventus Football Club’s revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
Importantly, Juventus Football Club had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at €41m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €145m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like Juventus Football Club 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.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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