Is Portale Sardegna (BIT:PSA) Using Debt Sensibly?

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.' 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. As with many other companies Portale Sardegna S.p.A. (BIT:PSA) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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What Is Portale Sardegna's Debt?

As you can see below, Portale Sardegna had €7.27m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have €4.00m in cash offsetting this, leading to net debt of about €3.28m.

A Look At Portale Sardegna's Liabilities

We can see from the most recent balance sheet that Portale Sardegna had liabilities of €6.06m falling due within a year, and liabilities of €7.17m due beyond that. Offsetting this, it had €4.00m in cash and €3.53m in receivables that were due within 12 months. So it has liabilities totalling €5.71m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €6.39m, so it does suggest shareholders should keep an eye on Portale Sardegna's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Portale Sardegna'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 Portale Sardegna wasn't profitable at an EBIT level, but managed to grow its revenue by 57%, to €8.2m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Portale Sardegna's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at €163k. 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. We would feel better if it turned its trailing twelve month loss of €229k into a profit. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Portale Sardegna that you should be aware of before investing here.

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.