Here's Why Vincenzo Zucchi (BIT:ZUC) Can Manage Its Debt Responsibly

By
Simply Wall St
Published
May 20, 2021
BIT:ZUC
Source: Shutterstock

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 Vincenzo Zucchi S.p.A. (BIT:ZUC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Vincenzo Zucchi

What Is Vincenzo Zucchi's Debt?

The image below, which you can click on for greater detail, shows that Vincenzo Zucchi had debt of €14.8m at the end of December 2020, a reduction from €88.9m over a year. However, because it has a cash reserve of €14.4m, its net debt is less, at about €462.0k.

debt-equity-history-analysis
BIT:ZUC Debt to Equity History May 21st 2021

How Strong Is Vincenzo Zucchi's Balance Sheet?

The latest balance sheet data shows that Vincenzo Zucchi had liabilities of €37.5m due within a year, and liabilities of €41.2m falling due after that. Offsetting this, it had €14.4m in cash and €23.3m in receivables that were due within 12 months. So its liabilities total €41.0m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €47.0m, so it does suggest shareholders should keep an eye on Vincenzo Zucchi's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Carrying virtually no net debt, Vincenzo Zucchi has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Vincenzo Zucchi has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.073 and EBIT of 13.8 times the interest expense. So relative to past earnings, the debt load seems trivial. And we also note warmly that Vincenzo Zucchi grew its EBIT by 16% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Vincenzo Zucchi will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Happily for any shareholders, Vincenzo Zucchi actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Happily, Vincenzo Zucchi's impressive interest cover implies it has the upper hand on its debt. But truth be told we feel its level of total liabilities does undermine this impression a bit. When we consider the range of factors above, it looks like Vincenzo Zucchi is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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 learn about the 3 warning signs we've spotted with Vincenzo Zucchi (including 1 which is significant) .

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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