Here's Why Italmobiliare (BIT:ITM) Can Manage Its Debt Responsibly

Warren Buffett famously said, '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. As with many other companies Italmobiliare S.p.A. (BIT:ITM) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

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What Is Italmobiliare's Net 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. But on the other hand it also has €302.5m in cash, leading to a €160.6m net cash position.

A Look At Italmobiliare's Liabilities

The latest balance sheet data shows that Italmobiliare had liabilities of €220.3m due within a year, and liabilities of €161.5m falling due after that. Offsetting these obligations, it had cash of €302.5m as well as receivables valued at €201.5m due within 12 months. So it actually has €122.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Italmobiliare could probably pay off its debt with ease, as its balance sheet is far from stretched. 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. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Italmobiliare recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Italmobiliare has net cash of €160.6m, as well as more liquid assets than liabilities. So we don't have any problem with Italmobiliare's use of debt. 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. For example - Italmobiliare has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.