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 Montebalito, S.A. (BME:MTB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Montebalito's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Montebalito had debt of €17.5m, up from €14.9m in one year. On the flip side, it has €4.79m in cash leading to net debt of about €12.7m.
How Strong Is Montebalito's Balance Sheet?
The latest balance sheet data shows that Montebalito had liabilities of €7.38m due within a year, and liabilities of €16.8m falling due after that. Offsetting these obligations, it had cash of €4.79m as well as receivables valued at €2.74m due within 12 months. So its liabilities total €16.6m 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 €42.0m, 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 76%, to €15m. With any luck the company will be able to grow its way to profitability.
Even though Montebalito managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable €11m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of €16m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Montebalito is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...
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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