Here's Why I Grandi Viaggi (BIT:IGV) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that I Grandi Viaggi S.p.A. (BIT:IGV) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for I Grandi Viaggi

What Is I Grandi Viaggi's Debt?

The image below, which you can click on for greater detail, shows that at July 2024 I Grandi Viaggi had debt of €5.11m, up from €4.23m in one year. But it also has €18.0m in cash to offset that, meaning it has €12.9m net cash.

A Look At I Grandi Viaggi's Liabilities

We can see from the most recent balance sheet that I Grandi Viaggi had liabilities of €38.1m falling due within a year, and liabilities of €11.4m due beyond that. Offsetting these obligations, it had cash of €18.0m as well as receivables valued at €5.87m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €25.6m.

While this might seem like a lot, it is not so bad since I Grandi Viaggi has a market capitalization of €52.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, I Grandi Viaggi also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for I Grandi Viaggi if management cannot prevent a repeat of the 22% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since I Grandi Viaggi will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While I Grandi Viaggi has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, I Grandi Viaggi actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While I Grandi Viaggi does have more liabilities than liquid assets, it also has net cash of €12.9m. And it impressed us with free cash flow of €6.3m, being 133% of its EBIT. So we don't have any problem with I Grandi Viaggi's use of debt. 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. For example - I Grandi Viaggi has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.