Is Radici Pietro Industries & Brands (BIT:RAD) Using Debt In A Risky Way?

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.' 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. As with many other companies Radici Pietro Industries & Brands S.p.A. (BIT:RAD) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Radici Pietro Industries & Brands

What Is Radici Pietro Industries & Brands's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Radici Pietro Industries & Brands had €22.8m of debt in December 2020, down from €27.7m, one year before. On the flip side, it has €3.40m in cash leading to net debt of about €19.4m.

How Strong Is Radici Pietro Industries & Brands' Balance Sheet?

According to the last reported balance sheet, Radici Pietro Industries & Brands had liabilities of €17.5m due within 12 months, and liabilities of €26.1m due beyond 12 months. On the other hand, it had cash of €3.40m and €13.0m worth of receivables due within a year. So its liabilities total €27.2m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €15.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Radici Pietro Industries & Brands would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Radici Pietro Industries & Brands's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Radici Pietro Industries & Brands made a loss at the EBIT level, and saw its revenue drop to €43m, which is a fall of 36%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Radici Pietro Industries & Brands's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost €909k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of €911k. And until that time we think this is a risky stock. 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. We've identified 2 warning signs with Radici Pietro Industries & Brands (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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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