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, Pininfarina S.p.A. (BIT:PINF) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Pininfarina
How Much Debt Does Pininfarina Carry?
The image below, which you can click on for greater detail, shows that Pininfarina had debt of €27.8m at the end of September 2020, a reduction from €29.5m over a year. However, it does have €15.7m in cash offsetting this, leading to net debt of about €12.1m.
A Look At Pininfarina's Liabilities
According to the last reported balance sheet, Pininfarina had liabilities of €40.5m due within 12 months, and liabilities of €30.5m due beyond 12 months. On the other hand, it had cash of €15.7m and €23.4m worth of receivables due within a year. So it has liabilities totalling €31.9m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Pininfarina has a market capitalization of €60.2m, 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 it is Pininfarina's earnings that will influence how the balance sheet holds up in the future. 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, Pininfarina made a loss at the EBIT level, and saw its revenue drop to €70m, which is a fall of 24%. To be frank that doesn't bode well.
Caveat Emptor
Not only did Pininfarina'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 €13m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €8.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 Pininfarina has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
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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About BIT:PINF
Pininfarina
Engages in the design, engineering, and sales of spare parts and prototypes in Italy, Germany, China, and the United States.
Mediocre balance sheet minimal.
