These 4 Measures Indicate That Cembre (BIT:CMB) Is Using Debt Reasonably Well

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. As with many other companies Cembre S.p.A. (BIT:CMB) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Cembre

What Is Cembre's Debt?

The image below, which you can click on for greater detail, shows that Cembre had debt of €16.4m at the end of March 2021, a reduction from €25.7m over a year. But on the other hand it also has €32.6m in cash, leading to a €16.2m net cash position.

A Look At Cembre's Liabilities

We can see from the most recent balance sheet that Cembre had liabilities of €42.3m falling due within a year, and liabilities of €10.9m due beyond that. Offsetting this, it had €32.6m in cash and €33.6m in receivables that were due within 12 months. So it can boast €13.1m more liquid assets than total liabilities.

This surplus suggests that Cembre has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Cembre has more cash than debt is arguably a good indication that it can manage its debt safely.

While Cembre doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Cembre's ability to maintain a healthy balance sheet going forward. 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. Cembre may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Cembre produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Cembre has €16.2m in net cash and a decent-looking balance sheet. So we don't think Cembre's use of debt is risky. 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. For example - Cembre has 1 warning sign we think you should be aware of.

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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