Here's Why FullSix (BIT:FUL) Can Afford Some Debt

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.' 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 FullSix S.p.A. (BIT:FUL) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 FullSix

How Much Debt Does FullSix Carry?

The image below, which you can click on for greater detail, shows that at September 2021 FullSix had debt of €3.07m, up from €2.08m in one year. However, it also had €639.0k in cash, and so its net debt is €2.43m.

How Healthy Is FullSix's Balance Sheet?

The latest balance sheet data shows that FullSix had liabilities of €5.26m due within a year, and liabilities of €3.42m falling due after that. Offsetting this, it had €639.0k in cash and €1.57m in receivables that were due within 12 months. So it has liabilities totalling €6.47m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €8.86m, so it does suggest shareholders should keep an eye on FullSix's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since FullSix 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.

Over 12 months, FullSix reported revenue of €5.6m, which is a gain of 3.3%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months FullSix produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping €2.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €1.2m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that FullSix is showing 4 warning signs in our investment analysis , and 3 of those can'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.