Is Illa (BIT:ILLA) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Illa S.p.A. (BIT:ILLA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Illa

How Much Debt Does Illa Carry?

The image below, which you can click on for greater detail, shows that at June 2020 Illa had debt of €11.7m, up from €11.1m in one year. On the flip side, it has €929.4k in cash leading to net debt of about €10.8m.

How Strong Is Illa's Balance Sheet?

The latest balance sheet data shows that Illa had liabilities of €17.0m due within a year, and liabilities of €9.97m falling due after that. Offsetting these obligations, it had cash of €929.4k as well as receivables valued at €6.20m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €19.8m.

This deficit casts a shadow over the €3.97m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Illa would likely require a major re-capitalisation if it had to pay its creditors today. 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 Illa 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.

In the last year Illa wasn't profitable at an EBIT level, but managed to grow its revenue by 5.3%, to €30m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Illa produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping €2.4m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized €1.3m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. For instance, we've identified 4 warning signs for Illa (2 are potentially serious) 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.

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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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