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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Italmobiliare S.p.A. (BIT:ITM) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Italmobiliare

What Is Italmobiliare's Debt?

As you can see below, at the end of June 2022, Italmobiliare had €142.0m of debt, up from €83.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds €302.5m in cash, so it actually has €160.6m net cash.

A Look At Italmobiliare's Liabilities

According to the last reported balance sheet, Italmobiliare had liabilities of €220.3m due within 12 months, and liabilities of €161.5m due beyond 12 months. Offsetting this, it had €302.5m in cash and €201.5m in receivables that were due within 12 months. So it can boast €122.3m 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!

But the bad news is that Italmobiliare has seen its EBIT plunge 11% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Italmobiliare 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 company can only pay off debt with cold hard cash, not accounting profits. Italmobiliare 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. In the last three years, Italmobiliare's free cash flow amounted to 27% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Italmobiliare has €160.6m in net cash and a decent-looking balance sheet. So we don't have any problem with Italmobiliare's use of debt. 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. We've identified 2 warning signs with Italmobiliare , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.