Montebalito (BME:MTB) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Montebalito, S.A. (BME:MTB) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Montebalito

What Is Montebalito's Debt?

The image below, which you can click on for greater detail, shows that Montebalito had debt of €11.6m at the end of December 2022, a reduction from €15.1m over a year. On the flip side, it has €2.01m in cash leading to net debt of about €9.60m.

How Strong Is Montebalito's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Montebalito had liabilities of €7.59m due within 12 months and liabilities of €18.9m due beyond that. Offsetting this, it had €2.01m in cash and €3.13m in receivables that were due within 12 months. So its liabilities total €21.3m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Montebalito has a market capitalization of €45.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Montebalito's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Montebalito's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Montebalito had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €1.4m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of €749k and the profit of €4.1m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Montebalito that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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