Is Portale Sardegna (BIT:PSA) A Risky Investment?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Portale Sardegna S.p.A. (BIT:PSA) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Portale Sardegna

What Is Portale Sardegna's Debt?

As you can see below, at the end of December 2020, Portale Sardegna had €8.78m of debt, up from €4.62m a year ago. Click the image for more detail. On the flip side, it has €3.42m in cash leading to net debt of about €5.36m.

A Look At Portale Sardegna's Liabilities

Zooming in on the latest balance sheet data, we can see that Portale Sardegna had liabilities of €1.90m due within 12 months and liabilities of €7.37m due beyond that. Offsetting this, it had €3.42m in cash and €1.06m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.79m.

This is a mountain of leverage relative to its market capitalization of €5.95m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Portale Sardegna 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.

Over 12 months, Portale Sardegna made a loss at the EBIT level, and saw its revenue drop to €4.3m, which is a fall of 63%. That makes us nervous, to say the least.

Caveat Emptor

While Portale Sardegna's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €449. 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. For example, we would not want to see a repeat of last year's loss of €227k. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 Portale Sardegna (including 2 which are significant) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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