Does FIPP (EPA:FIPP) Have A Healthy Balance Sheet?

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. Importantly, FIPP S.A. (EPA:FIPP) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for FIPP

How Much Debt Does FIPP Carry?

The image below, which you can click on for greater detail, shows that at December 2021 FIPP had debt of €8.94m, up from €89.0k in one year. However, it does have €870.0k in cash offsetting this, leading to net debt of about €8.07m.

How Healthy Is FIPP's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FIPP had liabilities of €26.6m due within 12 months and liabilities of €1.35m due beyond that. Offsetting these obligations, it had cash of €870.0k as well as receivables valued at €1.92m due within 12 months. So its liabilities total €25.2m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €15.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, FIPP would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is FIPP'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 FIPP had a loss before interest and tax, and actually shrunk its revenue by 3.8%, to €2.1m. We would much prefer see growth.

Caveat Emptor

Importantly, FIPP had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable €2.6m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through €1.8m in negative free cash flow over the last year. So suffice it to say we 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 example FIPP has 4 warning signs (and 2 which are significant) 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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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.