We Think Fiera Milano (BIT:FM) Is Taking Some Risk With Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Fiera Milano SpA (BIT:FM) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Fiera Milano

How Much Debt Does Fiera Milano Carry?

As you can see below, Fiera Milano had €27.5m of debt at September 2020, down from €33.6m a year prior. But on the other hand it also has €27.6m in cash, leading to a €31.0k net cash position.

How Healthy Is Fiera Milano's Balance Sheet?

According to the last reported balance sheet, Fiera Milano had liabilities of €172.5m due within 12 months, and liabilities of €430.8m due beyond 12 months. On the other hand, it had cash of €27.6m and €39.5m worth of receivables due within a year. So it has liabilities totalling €536.2m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €208.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Fiera Milano would likely require a major re-capitalisation if it had to pay its creditors today. Given that Fiera Milano has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Shareholders should be aware that Fiera Milano's EBIT was down 81% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Fiera Milano 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Fiera Milano 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. Happily for any shareholders, Fiera Milano actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Fiera Milano does have more liabilities than liquid assets, it also has net cash of €31.0k. And it impressed us with free cash flow of €4.4m, being 162% of its EBIT. Despite the cash, we do find Fiera Milano's level of total liabilities concerning, so we're not particularly comfortable with the stock. 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. Be aware that Fiera Milano is showing 2 warning signs in our investment analysis , you should know about...

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. 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.
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