Is Pininfarina (BIT:PINF) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Pininfarina S.p.A. (BIT:PINF) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Pininfarina

What Is Pininfarina's Debt?

The image below, which you can click on for greater detail, shows that Pininfarina had debt of €22.9m at the end of September 2021, a reduction from €27.8m over a year. But on the other hand it also has €32.5m in cash, leading to a €9.66m net cash position.

A Look At Pininfarina's Liabilities

The latest balance sheet data shows that Pininfarina had liabilities of €37.9m due within a year, and liabilities of €24.5m falling due after that. Offsetting this, it had €32.5m in cash and €22.5m in receivables that were due within 12 months. So it has liabilities totalling €7.37m more than its cash and near-term receivables, combined.

Since publicly traded Pininfarina shares are worth a total of €74.3m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Pininfarina also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Pininfarina will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Pininfarina had a loss before interest and tax, and actually shrunk its revenue by 3.4%, to €66m. We would much prefer see growth.

So How Risky Is Pininfarina?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Pininfarina lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €4.8m of cash and made a loss of €15m. With only €9.66m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Pininfarina is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.