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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Pininfarina S.p.A. (BIT:PINF) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Pininfarina

What Is Pininfarina's Net Debt?

The image below, which you can click on for greater detail, shows that Pininfarina had debt of €20.5m at the end of September 2022, a reduction from €22.9m over a year. But it also has €25.5m in cash to offset that, meaning it has €5.00m net cash.

How Healthy Is Pininfarina's Balance Sheet?

The latest balance sheet data shows that Pininfarina had liabilities of €34.9m due within a year, and liabilities of €20.7m falling due after that. On the other hand, it had cash of €25.5m and €25.8m worth of receivables due within a year. So its liabilities total €4.16m more than the combination of its cash and short-term receivables.

Given Pininfarina has a market capitalization of €64.5m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Pininfarina boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Pininfarina'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 Pininfarina wasn't profitable at an EBIT level, but managed to grow its revenue by 7.6%, to €71m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Pininfarina?

Although Pininfarina had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of €2.2m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Pininfarina is showing 2 warning signs in our investment analysis , 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. 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.