IRCE (BIT:IRC) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 IRCE S.p.A. (BIT:IRC) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for IRCE

What Is IRCE's Net Debt?

You can click the graphic below for the historical numbers, but it shows that IRCE had €45.1m of debt in September 2020, down from €57.0m, one year before. On the flip side, it has €5.78m in cash leading to net debt of about €39.3m.

How Healthy Is IRCE's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that IRCE had liabilities of €53.0m due within 12 months and liabilities of €27.7m due beyond that. Offsetting this, it had €5.78m in cash and €72.0m in receivables that were due within 12 months. So it has liabilities totalling €2.92m more than its cash and near-term receivables, combined.

Of course, IRCE has a market capitalization of €47.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 IRCE can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, IRCE made a loss at the EBIT level, and saw its revenue drop to €277m, which is a fall of 14%. That's not what we would hope to see.

Caveat Emptor

While IRCE's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost €736k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of €13m and a profit of €461k. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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, we've discovered 3 warning signs for IRCE that you should be aware of before investing here.

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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