Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Piquadro S.p.A. (BIT:PQ) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Piquadro
What Is Piquadro's Debt?
As you can see below, at the end of September 2020, Piquadro had €42.6m of debt, up from €21.4m a year ago. Click the image for more detail. However, it does have €51.6m in cash offsetting this, leading to net cash of €9.01m.
How Healthy Is Piquadro's Balance Sheet?
According to the last reported balance sheet, Piquadro had liabilities of €72.7m due within 12 months, and liabilities of €77.0m due beyond 12 months. On the other hand, it had cash of €51.6m and €34.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €64.1m.
This is a mountain of leverage relative to its market capitalization of €70.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Piquadro boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Piquadro's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Piquadro had a loss before interest and tax, and actually shrunk its revenue by 22%, to €125m. That makes us nervous, to say the least.
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 €6.5m. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Piquadro has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
Excellent balance sheet established dividend payer.
