Gismondi 1754 (BIT:GIS) Has A Pretty Healthy Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Gismondi 1754 S.p.A. (BIT:GIS) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Gismondi 1754

What Is Gismondi 1754's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Gismondi 1754 had debt of €2.58m, up from €2.45m in one year. However, it does have €2.87m in cash offsetting this, leading to net cash of €290.4k.

How Strong Is Gismondi 1754's Balance Sheet?

According to the last reported balance sheet, Gismondi 1754 had liabilities of €4.09m due within 12 months, and liabilities of €2.16m due beyond 12 months. Offsetting these obligations, it had cash of €2.87m as well as receivables valued at €4.04m due within 12 months. So it actually has €660.7k more liquid assets than total liabilities.

This short term liquidity is a sign that Gismondi 1754 could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Gismondi 1754 has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Gismondi 1754 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 Gismondi 1754 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. Gismondi 1754 may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Gismondi 1754 recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While it is always sensible to investigate a company's debt, in this case Gismondi 1754 has €290.4k in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 45% over the last year. So we don't have any problem with Gismondi 1754'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. Be aware that Gismondi 1754 is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.