Here's Why Edil San Felice (BIT:ESF) Can Manage Its Debt Responsibly

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Edil San Felice S.p.A. (BIT:ESF) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Edil San Felice

What Is Edil San Felice's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Edil San Felice had debt of €6.28m, up from €2.40m in one year. But it also has €12.3m in cash to offset that, meaning it has €5.99m net cash.

How Strong Is Edil San Felice's Balance Sheet?

According to the last reported balance sheet, Edil San Felice had liabilities of €17.7m due within 12 months, and liabilities of €8.11m due beyond 12 months. Offsetting these obligations, it had cash of €12.3m as well as receivables valued at €25.4m due within 12 months. So it can boast €11.9m more liquid assets than total liabilities.

This surplus suggests that Edil San Felice has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Edil San Felice boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Edil San Felice grew its EBIT by 66% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Edil San Felice 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 Edil San Felice 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. During the last three years, Edil San Felice burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Edil San Felice has net cash of €5.99m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 66% over the last year. So we are not troubled with Edil San Felice's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Edil San Felice is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

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.