Is Barbara Bui (EPA:BUI) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Barbara Bui SA (EPA:BUI) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Barbara Bui

What Is Barbara Bui's Debt?

As you can see below, at the end of December 2021, Barbara Bui had €2.44m of debt, up from €2.32m a year ago. Click the image for more detail. However, because it has a cash reserve of €1.93m, its net debt is less, at about €508.0k.

A Look At Barbara Bui's Liabilities

According to the last reported balance sheet, Barbara Bui had liabilities of €3.61m due within 12 months, and liabilities of €3.49m due beyond 12 months. Offsetting this, it had €1.93m in cash and €1.48m in receivables that were due within 12 months. So it has liabilities totalling €3.69m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Barbara Bui has a market capitalization of €6.27m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Barbara Bui will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Barbara Bui wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to €9.3m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Barbara Bui still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €933k. 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. For example, we would not want to see a repeat of last year's loss of €448k. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Barbara Bui (at least 2 which are significant) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.