Is FIPP (EPA:FIPP) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that FIPP S.A. (EPA:FIPP) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for FIPP

What Is FIPP's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 FIPP had €8.89m of debt, an increase on €116.0k, over one year. However, it does have €2.64m in cash offsetting this, leading to net debt of about €6.24m.

How Strong Is FIPP's Balance Sheet?

The latest balance sheet data shows that FIPP had liabilities of €26.8m due within a year, and liabilities of €1.26m falling due after that. Offsetting this, it had €2.64m in cash and €1.65m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €23.7m.

Given this deficit is actually higher than the company's market capitalization of €20.6m, 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. 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 9.0%, to €2.2m. That's not what we would hope to see.

Caveat Emptor

Importantly, FIPP had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable €3.2m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous 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 €10m over the last twelve months. That means it's on the risky side of things. 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 instance, we've identified 4 warning signs for FIPP (2 make us uncomfortable) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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