These 4 Measures Indicate That Buzzi Unicem (BIT:BZU) Is Using Debt Reasonably Well

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. As with many other companies Buzzi Unicem S.p.A. (BIT:BZU) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Buzzi Unicem

What Is Buzzi Unicem's Debt?

You can click the graphic below for the historical numbers, but it shows that Buzzi Unicem had €1.14b of debt in December 2021, down from €1.24b, one year before. But it also has €1.20b in cash to offset that, meaning it has €66.5m net cash.

A Look At Buzzi Unicem's Liabilities

We can see from the most recent balance sheet that Buzzi Unicem had liabilities of €673.5m falling due within a year, and liabilities of €1.87b due beyond that. Offsetting this, it had €1.20b in cash and €530.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €811.1m.

Buzzi Unicem has a market capitalization of €3.21b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Buzzi Unicem boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Buzzi Unicem grew its EBIT by 3.8% in the last year, making that debt load look even more manageable. 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 Buzzi Unicem'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 Buzzi Unicem 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. During the last three years, Buzzi Unicem produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Buzzi Unicem's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €66.5m. And it impressed us with free cash flow of €377m, being 70% of its EBIT. So we don't have any problem with Buzzi Unicem's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Buzzi Unicem's earnings per share history for free.

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.