Is Longino & Cardenal (BIT:LON) Using Debt In A Risky Way?

By
Simply Wall St
Published
October 02, 2020
BIT:LON

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.' 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. Importantly, Longino & Cardenal S.p.A. (BIT:LON) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Longino & Cardenal

What Is Longino & Cardenal's Net Debt?

As you can see below, at the end of June 2020, Longino & Cardenal had €1.87m of debt, up from €1.07m a year ago. Click the image for more detail. But it also has €2.16m in cash to offset that, meaning it has €288.2k net cash.

debt-equity-history-analysis
BIT:LON Debt to Equity History October 2nd 2020

How Strong Is Longino & Cardenal's Balance Sheet?

According to the last reported balance sheet, Longino & Cardenal had liabilities of €3.12m due within 12 months, and liabilities of €2.64m due beyond 12 months. On the other hand, it had cash of €2.16m and €7.00m worth of receivables due within a year. So it actually has €3.40m more liquid assets than total liabilities.

This excess liquidity suggests that Longino & Cardenal is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Longino & Cardenal has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Longino & Cardenal 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.

In the last year Longino & Cardenal had a loss before interest and tax, and actually shrunk its revenue by 21%, to €26m. To be frank that doesn't bode well.

So How Risky Is Longino & Cardenal?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Longino & Cardenal had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €2.7m of cash and made a loss of €772k. With only €288.2k on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Longino & Cardenal .

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. 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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