Grifal (BIT:GRAL) Is Carrying A Fair Bit Of Debt

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.' 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 note that Grifal S.p.A. (BIT:GRAL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Grifal

What Is Grifal's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Grifal had €9.61m of debt, an increase on €4.90m, over one year. However, because it has a cash reserve of €2.79m, its net debt is less, at about €6.81m.

How Healthy Is Grifal's Balance Sheet?

According to the last reported balance sheet, Grifal had liabilities of €8.15m due within 12 months, and liabilities of €8.44m due beyond 12 months. Offsetting this, it had €2.79m in cash and €7.40m in receivables that were due within 12 months. So it has liabilities totalling €6.41m more than its cash and near-term receivables, combined.

Given Grifal has a market capitalization of €42.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Grifal can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Grifal had a loss before interest and tax, and actually shrunk its revenue by 8.0%, to €20m. We would much prefer see growth.

Caveat Emptor

Importantly, Grifal had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €1.0m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €1.9m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Grifal (2 don't sit too well with us!) 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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