Does Italmobiliare (BIT:ITM) Have A Healthy Balance Sheet?

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. We can see that Italmobiliare S.p.A. (BIT:ITM) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Italmobiliare

What Is Italmobiliare's Debt?

The image below, which you can click on for greater detail, shows that Italmobiliare had debt of €123.0m at the end of December 2020, a reduction from €161.4m over a year. But it also has €447.2m in cash to offset that, meaning it has €324.3m net cash.

A Look At Italmobiliare's Liabilities

According to the last reported balance sheet, Italmobiliare had liabilities of €243.3m due within 12 months, and liabilities of €177.6m due beyond 12 months. Offsetting this, it had €447.2m in cash and €94.0m in receivables that were due within 12 months. So it actually has €120.4m more liquid assets than total liabilities.

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

The modesty of its debt load may become crucial for Italmobiliare if management cannot prevent a repeat of the 31% cut to EBIT 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 it is future earnings, more than anything, that will determine Italmobiliare'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Italmobiliare 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, Italmobiliare produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Italmobiliare has €324.3m in net cash and a decent-looking balance sheet. So we are not troubled with Italmobiliare's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Italmobiliare 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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