We Think Biesse (BIT:BSS) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Biesse S.p.A. (BIT:BSS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Biesse

How Much Debt Does Biesse Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Biesse had €111.7m of debt, an increase on €72.9m, over one year. But on the other hand it also has €163.4m in cash, leading to a €51.7m net cash position.

How Strong Is Biesse's Balance Sheet?

According to the last reported balance sheet, Biesse had liabilities of €359.9m due within 12 months, and liabilities of €83.5m due beyond 12 months. On the other hand, it had cash of €163.4m and €117.6m worth of receivables due within a year. So it has liabilities totalling €162.4m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Biesse is worth €659.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Biesse also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Biesse's EBIT was down 67% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Biesse can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Biesse has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Biesse recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While Biesse does have more liabilities than liquid assets, it also has net cash of €51.7m. And it impressed us with free cash flow of €73m, being 87% of its EBIT. So we are not troubled with Biesse's debt use. 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. For example - Biesse has 3 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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