Does Innovatec (BIT:INC) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Innovatec S.p.A. (BIT:INC) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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 Innovatec

How Much Debt Does Innovatec Carry?

As you can see below, Innovatec had €3.45m of debt at December 2020, down from €5.35m a year prior. However, it does have €16.9m in cash offsetting this, leading to net cash of €13.5m.

A Look At Innovatec's Liabilities

According to the last reported balance sheet, Innovatec had liabilities of €40.4m due within 12 months, and liabilities of €52.0m due beyond 12 months. Offsetting this, it had €16.9m in cash and €32.5m in receivables that were due within 12 months. So it has liabilities totalling €43.0m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €55.4m, so it does suggest shareholders should keep an eye on Innovatec's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Innovatec also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Innovatec if management cannot prevent a repeat of the 66% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Innovatec will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Innovatec 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, Innovatec produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Innovatec's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €13.5m. And it impressed us with free cash flow of €254k, being 69% of its EBIT. So while Innovatec does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Innovatec is showing 5 warning signs in our investment analysis , you should know about...

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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