Longino & Cardenal (BIT:LON) Is Making Moderate Use Of Debt

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 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. We can see that Longino & Cardenal S.p.A. (BIT:LON) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Longino & Cardenal

What Is Longino & Cardenal's Debt?

As you can see below, at the end of December 2022, Longino & Cardenal had €6.40m of debt, up from €5.33m a year ago. Click the image for more detail. However, it also had €1.38m in cash, and so its net debt is €5.02m.

How Strong Is Longino & Cardenal's Balance Sheet?

We can see from the most recent balance sheet that Longino & Cardenal had liabilities of €12.9m falling due within a year, and liabilities of €1.15m due beyond that. Offsetting these obligations, it had cash of €1.38m as well as receivables valued at €7.59m due within 12 months. So its liabilities total €5.09m more than the combination of its cash and short-term receivables.

Longino & Cardenal has a market capitalization of €14.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Longino & Cardenal's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Longino & Cardenal wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to €32m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Longino & Cardenal still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €1.4m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €1.9m of cash over the last year. So in short it's a really risky stock. 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 - Longino & Cardenal has 2 warning signs we think you should be aware of.

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.