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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Piquadro S.p.A. (BIT:PQ) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Piquadro
What Is Piquadro's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Piquadro had debt of €42.6m, up from €21.4m in one year. However, its balance sheet shows it holds €51.6m in cash, so it actually has €9.01m net cash.
How Strong Is Piquadro's Balance Sheet?
According to the last reported balance sheet, Piquadro had liabilities of €74.4m due within 12 months, and liabilities of €75.4m due beyond 12 months. Offsetting this, it had €51.6m in cash and €35.8m in receivables that were due within 12 months. So its liabilities total €62.3m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of €85.0m, so it does suggest shareholders should keep an eye on Piquadro's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Piquadro also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Piquadro's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Piquadro made a loss at the EBIT level, and saw its revenue drop to €125m, which is a fall of 22%. To be frank that doesn't bode well.
So How Risky Is Piquadro?
Although Piquadro had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €6.4m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Piquadro .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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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About BIT:PQ
Piquadro
Designs, manufactures, sells, and markets leather accessories and travel products in Italy and internationally.
Flawless balance sheet with solid track record and pays a dividend.
