Is Tesmec (BIT:TES) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Tesmec S.p.A. (BIT:TES) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tesmec

What Is Tesmec's Debt?

The image below, which you can click on for greater detail, shows that Tesmec had debt of €87.3m at the end of December 2020, a reduction from €128.5m over a year. However, it also had €49.0m in cash, and so its net debt is €38.4m.

How Strong Is Tesmec's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tesmec had liabilities of €183.0m due within 12 months and liabilities of €110.5m due beyond that. On the other hand, it had cash of €49.0m and €93.5m worth of receivables due within a year. So it has liabilities totalling €151.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €74.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Tesmec would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tesmec can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Tesmec made a loss at the EBIT level, and saw its revenue drop to €171m, which is a fall of 15%. That's not what we would hope to see.

Caveat Emptor

Not only did Tesmec's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost €853k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of €6.8m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Tesmec is showing 4 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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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