Health Check: How Prudently Does Seri Industrial (BIT:SERI) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Seri Industrial S.p.A. (BIT:SERI) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Seri Industrial

What Is Seri Industrial's Net Debt?

The image below, which you can click on for greater detail, shows that Seri Industrial had debt of €92.2m at the end of June 2024, a reduction from €102.1m over a year. However, it does have €37.3m in cash offsetting this, leading to net debt of about €55.0m.

A Look At Seri Industrial's Liabilities

Zooming in on the latest balance sheet data, we can see that Seri Industrial had liabilities of €148.8m due within 12 months and liabilities of €167.0m due beyond that. Offsetting this, it had €37.3m in cash and €86.8m in receivables that were due within 12 months. So its liabilities total €191.8m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of €172.2m, we think shareholders really should watch Seri Industrial's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Seri Industrial can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Seri Industrial reported revenue of €183m, which is a gain of 3.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Seri Industrial produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €5.8m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of €10m. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Seri Industrial has 1 warning sign we think you should be aware of.

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.

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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.