Fiera Milano (BIT:FM) Has A Somewhat Strained Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Fiera Milano S.p.A. (BIT:FM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

We've discovered 2 warning signs about Fiera Milano. View them for free.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Fiera Milano's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Fiera Milano had €12.4m of debt in December 2024, down from €58.6m, one year before. However, it does have €78.3m in cash offsetting this, leading to net cash of €65.9m.

A Look At Fiera Milano's Liabilities

Zooming in on the latest balance sheet data, we can see that Fiera Milano had liabilities of €194.5m due within 12 months and liabilities of €307.1m due beyond that. Offsetting these obligations, it had cash of €78.3m as well as receivables valued at €61.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €361.4m.

This deficit is considerable relative to its market capitalization of €411.8m, so it does suggest shareholders should keep an eye on Fiera Milano's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Fiera Milano boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Fiera Milano

Shareholders should be aware that Fiera Milano's EBIT was down 35% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Fiera Milano'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 Fiera Milano 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, Fiera Milano actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Fiera Milano's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €65.9m. And it impressed us with free cash flow of €53m, being 217% of its EBIT. So while Fiera Milano does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Fiera Milano , and understanding them should be part of your investment process.

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.