Masi Agricola (BIT:MASI) Seems To Use Debt Quite 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.' 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 Masi Agricola S.p.A. (BIT:MASI) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Masi Agricola

How Much Debt Does Masi Agricola Carry?

As you can see below, Masi Agricola had €5.52m of debt at December 2020, down from €14.1m a year prior. But on the other hand it also has €16.2m in cash, leading to a €10.7m net cash position.

How Healthy Is Masi Agricola's Balance Sheet?

According to the last reported balance sheet, Masi Agricola had liabilities of €12.8m due within 12 months, and liabilities of €18.0m due beyond 12 months. Offsetting these obligations, it had cash of €16.2m as well as receivables valued at €12.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.11m.

Since publicly traded Masi Agricola shares are worth a total of €90.3m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Masi Agricola boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Masi Agricola's EBIT was down 79% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Masi Agricola'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Masi Agricola may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Masi Agricola generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

We could understand if investors are concerned about Masi Agricola's liabilities, but we can be reassured by the fact it has has net cash of €10.7m. And it impressed us with free cash flow of €7.9m, being 82% of its EBIT. So we don't have any problem with Masi Agricola's use of debt. 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. Be aware that Masi Agricola is showing 4 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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