Monnalisa (BIT:MNL) Has Debt But No Earnings; Should You Worry?

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. As with many other companies Monnalisa S.p.A. (BIT:MNL) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Monnalisa

What Is Monnalisa's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Monnalisa had €16.9m of debt, an increase on €12.2m, over one year. On the flip side, it has €4.40m in cash leading to net debt of about €12.5m.

How Strong Is Monnalisa's Balance Sheet?

According to the last reported balance sheet, Monnalisa had liabilities of €26.3m due within 12 months, and liabilities of €22.3m due beyond 12 months. On the other hand, it had cash of €4.40m and €8.05m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €36.1m.

This deficit casts a shadow over the €6.47m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Monnalisa would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Monnalisa's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Monnalisa made a loss at the EBIT level, and saw its revenue drop to €43m, which is a fall of 9.4%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Monnalisa produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable €4.5m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost €6.7m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Monnalisa (of which 1 doesn't sit too well with us!) 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.