Stock Analysis

Is Technogym (BIT:TGYM) Using Too Much Debt?

BIT:TGYM
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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. Importantly, Technogym S.p.A. (BIT:TGYM) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Technogym

How Much Debt Does Technogym Carry?

As you can see below, at the end of June 2021, Technogym had €108.8m of debt, up from €83.2m a year ago. Click the image for more detail. But it also has €203.5m in cash to offset that, meaning it has €94.7m net cash.

debt-equity-history-analysis
BIT:TGYM Debt to Equity History December 28th 2021

How Healthy Is Technogym's Balance Sheet?

The latest balance sheet data shows that Technogym had liabilities of €306.4m due within a year, and liabilities of €102.9m falling due after that. On the other hand, it had cash of €203.5m and €83.3m worth of receivables due within a year. So it has liabilities totalling €122.5m more than its cash and near-term receivables, combined.

Since publicly traded Technogym shares are worth a total of €1.72b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Technogym boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Technogym's load is not too heavy, because its EBIT was down 28% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Technogym 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Technogym may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Technogym recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

We could understand if investors are concerned about Technogym's liabilities, but we can be reassured by the fact it has has net cash of €94.7m. And it impressed us with free cash flow of €89m, being 86% of its EBIT. So we are not troubled with Technogym's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Technogym .

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. 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.