Is Barbara Bui (EPA:BUI) Using Debt In A Risky Way?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Barbara Bui SA (EPA:BUI) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Barbara Bui

What Is Barbara Bui's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Barbara Bui had debt of €2.45m, up from €2.31m in one year. However, it also had €2.36m in cash, and so its net debt is €89.0k.

A Look At Barbara Bui's Liabilities

Zooming in on the latest balance sheet data, we can see that Barbara Bui had liabilities of €6.33m due within 12 months and liabilities of €3.74m due beyond that. Offsetting these obligations, it had cash of €2.36m as well as receivables valued at €2.06m due within 12 months. So it has liabilities totalling €5.65m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €6.59m, so it does suggest shareholders should keep an eye on Barbara Bui's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Carrying virtually no net debt, Barbara Bui has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Barbara Bui'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 Barbara Bui had a loss before interest and tax, and actually shrunk its revenue by 10%, to €7.9m. We would much prefer see growth.

Caveat Emptor

While Barbara Bui's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable €1.9m 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. However, it doesn't help that it burned through €66k of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Barbara Bui (2 don't sit too well with us) 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.