Here's Why Cairo Communication (BIT:CAI) Can Manage Its Debt Responsibly

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. Importantly, Cairo Communication S.p.A. (BIT:CAI) does carry debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Cairo Communication's Net Debt?

The chart below, which you can click on for greater detail, shows that Cairo Communication had €61.9m in debt in December 2024; about the same as the year before. However, it does have €83.3m in cash offsetting this, leading to net cash of €21.4m.

How Strong Is Cairo Communication's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cairo Communication had liabilities of €489.6m due within 12 months and liabilities of €393.3m due beyond that. Offsetting these obligations, it had cash of €83.3m as well as receivables valued at €338.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €460.8m.

When you consider that this deficiency exceeds the company's €430.1m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Cairo Communication boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

View our latest analysis for Cairo Communication

Another good sign is that Cairo Communication has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. 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 Cairo Communication's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Cairo Communication 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. Over the most recent three years, Cairo Communication recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Cairo Communication's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €21.4m. And we liked the look of last year's 24% year-on-year EBIT growth. So we don't have any problem with Cairo Communication's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Cairo Communication, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.