Sciuker Frames (BIT:SCK) Seems To Use Debt Quite Sensibly

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.' 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. Importantly, Sciuker Frames S.p.A. (BIT:SCK) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sciuker Frames

What Is Sciuker Frames's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Sciuker Frames had debt of €10.3m, up from €9.69m in one year. But on the other hand it also has €10.5m in cash, leading to a €159.0k net cash position.

How Strong Is Sciuker Frames' Balance Sheet?

According to the last reported balance sheet, Sciuker Frames had liabilities of €14.1m due within 12 months, and liabilities of €12.6m due beyond 12 months. Offsetting this, it had €10.5m in cash and €6.43m in receivables that were due within 12 months. So it has liabilities totalling €9.78m more than its cash and near-term receivables, combined.

Of course, Sciuker Frames has a market capitalization of €75.6m, 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. While it does have liabilities worth noting, Sciuker Frames also has more cash than debt, so we're pretty confident it can manage its debt safely.

Pleasingly, Sciuker Frames is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 195% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sciuker Frames will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sciuker Frames 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. Over the last three years, Sciuker Frames saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While Sciuker Frames does have more liabilities than liquid assets, it also has net cash of €159.0k. And we liked the look of last year's 195% year-on-year EBIT growth. So we don't have any problem with Sciuker Frames's use of debt. 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. We've identified 3 warning signs with Sciuker Frames (at least 1 which is significant) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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