Would Grifal (BIT:GRAL) Be Better Off With Less Debt?

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 can see that Grifal S.p.A. (BIT:GRAL) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Grifal

How Much Debt Does Grifal Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Grifal had €12.9m of debt, an increase on €9.61m, over one year. On the flip side, it has €426.8k in cash leading to net debt of about €12.4m.

A Look At Grifal's Liabilities

The latest balance sheet data shows that Grifal had liabilities of €15.6m due within a year, and liabilities of €9.87m falling due after that. Offsetting these obligations, it had cash of €426.8k as well as receivables valued at €11.0m due within 12 months. So it has liabilities totalling €14.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Grifal has a market capitalization of €32.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Grifal'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.

In the last year Grifal wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to €30m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Grifal still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €724k. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €5.6m of cash over the last year. So suffice it to say we consider the stock very 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 (1 doesn't sit too well with us!) that you should be aware of before investing here.

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. 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.