We Think Cairo Communication (BIT:CAI) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Cairo Communication S.p.A. (BIT:CAI) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cairo Communication

What Is Cairo Communication's Debt?

As you can see below, Cairo Communication had €88.8m of debt at September 2021, down from €179.5m a year prior. However, its balance sheet shows it holds €90.1m in cash, so it actually has €1.30m net cash.

How Healthy Is Cairo Communication's Balance Sheet?

According to the last reported balance sheet, Cairo Communication had liabilities of €139.0m due within 12 months, and liabilities of €470.5m due beyond 12 months. On the other hand, it had cash of €90.1m and €354.8m worth of receivables due within a year. So it has liabilities totalling €164.6m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €270.2m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Cairo Communication boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Cairo Communication grew its EBIT by 270% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Cairo Communication 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 last three years, Cairo Communication actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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 €1.30m. And it impressed us with free cash flow of €96m, being 114% of its EBIT. So we don't think Cairo Communication's use of debt 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 Cairo Communication has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.