Here's Why Fiera Milano (BIT:FM) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Fiera Milano SpA (BIT:FM) does use debt in its business. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Fiera Milano

What Is Fiera Milano's Debt?

As you can see below, Fiera Milano had €37.9m of debt at September 2024, down from €59.1m a year prior. But it also has €89.7m in cash to offset that, meaning it has €51.8m net cash.

How Strong Is Fiera Milano's Balance Sheet?

According to the last reported balance sheet, Fiera Milano had liabilities of €200.9m due within 12 months, and liabilities of €337.0m due beyond 12 months. Offsetting these obligations, it had cash of €89.7m as well as receivables valued at €51.0m due within 12 months. So its liabilities total €397.2m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of €390.6m, we think shareholders really should watch Fiera Milano's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Given that Fiera Milano has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Notably, Fiera Milano's EBIT launched higher than Elon Musk, gaining a whopping 383% on last year. 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 Fiera Milano 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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 €51.8m. The cherry on top was that in converted 378% of that EBIT to free cash flow, bringing in €62m. So we don't have any problem with Fiera Milano's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with Fiera Milano (including 1 which shouldn't be ignored) .

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.