Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 I.CERAM SA (EPA:ALICR) 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is I.CERAM's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2020 I.CERAM had debt of €1.49m, up from €1.26m in one year. On the flip side, it has €143.7k in cash leading to net debt of about €1.35m.
A Look At I.CERAM's Liabilities
The latest balance sheet data shows that I.CERAM had liabilities of €687.8k due within a year, and liabilities of €2.41m falling due after that. Offsetting these obligations, it had cash of €143.7k as well as receivables valued at €1.05m due within 12 months. So it has liabilities totalling €1.90m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since I.CERAM has a market capitalization of €8.36m, 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 ultimately the future profitability of the business will decide if I.CERAM 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.
Over 12 months, I.CERAM reported revenue of €1.9m, which is a gain of 19%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months I.CERAM produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping €1.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €447k in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example I.CERAM has 5 warning signs (and 1 which is potentially serious) we think you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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