Would Italia Independent Group (BIT:IIG) Be Better Off With Less 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.' 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 note that Italia Independent Group S.p.A. (BIT:IIG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Italia Independent Group

What Is Italia Independent Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Italia Independent Group had €17.7m of debt, an increase on €13.4m, over one year. However, because it has a cash reserve of €495.7k, its net debt is less, at about €17.2m.

How Healthy Is Italia Independent Group's Balance Sheet?

We can see from the most recent balance sheet that Italia Independent Group had liabilities of €10.2m falling due within a year, and liabilities of €15.6m due beyond that. Offsetting this, it had €495.7k in cash and €15.8m in receivables that were due within 12 months. So it has liabilities totalling €9.49m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Italia Independent Group has a market capitalization of €21.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Italia Independent Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Italia Independent Group wasn't profitable at an EBIT level, but managed to grow its revenue by 176%, to €14m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Despite the top line growth, Italia Independent Group still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €900k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €9.1m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Italia Independent Group is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.