We Think Biesse (BIT:BSS) Is Taking Some Risk With Its Debt

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.' 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. As with many other companies Biesse S.p.A. (BIT:BSS) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Biesse

How Much Debt Does Biesse Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Biesse had debt of €131.6m, up from €80.6m in one year. But on the other hand it also has €159.1m in cash, leading to a €27.5m net cash position.

A Look At Biesse's Liabilities

The latest balance sheet data shows that Biesse had liabilities of €214.9m due within a year, and liabilities of €190.5m falling due after that. On the other hand, it had cash of €159.1m and €96.4m worth of receivables due within a year. So its liabilities total €149.8m more than the combination of its cash and short-term receivables.

Biesse has a market capitalization of €477.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Biesse boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Biesse's load is not too heavy, because its EBIT was down 74% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Biesse recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

Although Biesse's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €27.5m. So although we see some areas for improvement, we're not too worried about Biesse's balance sheet. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Biesse , and understanding them should be part of your investment process.

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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