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

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.' 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 note that Sciuker Frames S.p.A. (BIT:SCK) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sciuker Frames

How Much Debt Does Sciuker Frames Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Sciuker Frames had €47.3m of debt, an increase on €13.1m, over one year. But on the other hand it also has €56.2m in cash, leading to a €8.97m net cash position.

How Strong Is Sciuker Frames' Balance Sheet?

The latest balance sheet data shows that Sciuker Frames had liabilities of €148.8m due within a year, and liabilities of €39.9m falling due after that. On the other hand, it had cash of €56.2m and €52.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €80.1m.

This deficit isn't so bad because Sciuker Frames is worth €146.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Sciuker Frames boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Sciuker Frames grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sciuker Frames 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, while the tax-man may adore accounting profits, lenders only accept 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 recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

Although Sciuker Frames's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €8.97m. And we liked the look of last year's 45% year-on-year EBIT growth. So we are not troubled with Sciuker Frames'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. For instance, we've identified 3 warning signs for Sciuker Frames (1 is concerning) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.