Health Check: How Prudently Does FIPP (EPA:FIPP) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 FIPP S.A. (EPA:FIPP) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for FIPP

How Much Debt Does FIPP Carry?

You can click the graphic below for the historical numbers, but it shows that FIPP had €14.7m of debt in June 2020, down from €17.6m, one year before. However, it does have €1.06m in cash offsetting this, leading to net debt of about €13.7m.

How Strong Is FIPP's Balance Sheet?

We can see from the most recent balance sheet that FIPP had liabilities of €32.3m falling due within a year, and liabilities of €1.32m due beyond that. On the other hand, it had cash of €1.06m and €4.03m worth of receivables due within a year. So its liabilities total €28.5m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of €24.0m, we think shareholders really should watch FIPP's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since FIPP will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, FIPP made a loss at the EBIT level, and saw its revenue drop to €2.1m, which is a fall of 30%. To be frank that doesn't bode well.

Caveat Emptor

Not only did FIPP's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €2.9m. 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 had negative free cash flow of €4.8m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for FIPP you should be aware of, and 1 of them is concerning.

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.

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