Is Newlat Food (BIT:NWL) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Newlat Food S.p.A. (BIT:NWL) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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 Newlat Food

How Much Debt Does Newlat Food Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Newlat Food had €155.1m of debt, an increase on €34.5m, over one year. However, its balance sheet shows it holds €163.5m in cash, so it actually has €8.44m net cash.

How Strong Is Newlat Food's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Newlat Food had liabilities of €214.6m due within 12 months and liabilities of €140.6m due beyond that. Offsetting these obligations, it had cash of €163.5m as well as receivables valued at €80.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €111.6m.

This deficit isn't so bad because Newlat Food is worth €241.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Newlat Food also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Newlat Food grew its EBIT by 166% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Newlat Food's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Newlat Food has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Newlat Food actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Newlat Food does have more liabilities than liquid assets, it also has net cash of €8.44m. The cherry on top was that in converted 200% of that EBIT to free cash flow, bringing in €32m. So is Newlat Food's debt a risk? It doesn't seem so to us. 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 instance, we've identified 4 warning signs for Newlat Food (1 is potentially serious) you should be aware of.

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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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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