Culti Milano (BIT:CULT) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Culti Milano S.p.A. (BIT:CULT) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Culti Milano

What Is Culti Milano's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Culti Milano had debt of €4.22m, up from €4.02m in one year. But on the other hand it also has €6.44m in cash, leading to a €2.22m net cash position.

A Look At Culti Milano's Liabilities

According to the last reported balance sheet, Culti Milano had liabilities of €6.79m due within 12 months, and liabilities of €3.97m due beyond 12 months. Offsetting these obligations, it had cash of €6.44m as well as receivables valued at €4.62m due within 12 months. So it actually has €297.3k more liquid assets than total liabilities.

This state of affairs indicates that Culti Milano's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €35.2m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Culti Milano boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Culti Milano grew its EBIT by 390% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Culti Milano'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, a company can only pay off debt with cold hard cash, not accounting profits. Culti Milano 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. Happily for any shareholders, Culti Milano actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Culti Milano has net cash of €2.22m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €2.1m, being 101% of its EBIT. So is Culti Milano's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Culti Milano you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.