Is Caltagirone Editore (BIT:CED) A Risky Investment?

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, Caltagirone Editore SpA (BIT:CED) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Caltagirone Editore

What Is Caltagirone Editore's Net Debt?

As you can see below, Caltagirone Editore had €8.13m of debt at December 2020, down from €9.29m a year prior. However, it does have €100.5m in cash offsetting this, leading to net cash of €92.4m.

How Strong Is Caltagirone Editore's Balance Sheet?

According to the last reported balance sheet, Caltagirone Editore had liabilities of €63.0m due within 12 months, and liabilities of €47.9m due beyond 12 months. On the other hand, it had cash of €100.5m and €41.0m worth of receivables due within a year. So it can boast €30.6m more liquid assets than total liabilities.

This surplus strongly suggests that Caltagirone Editore has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Caltagirone Editore has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Caltagirone Editore made a loss at the EBIT level, last year, it was also good to see that it generated €2.9m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Caltagirone Editore will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Caltagirone Editore 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. Happily for any shareholders, Caltagirone Editore actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Caltagirone Editore has €92.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €6.0m, being 206% of its EBIT. So we don't think Caltagirone Editore's use of debt is risky. Even though Caltagirone Editore lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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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