We Think FullSix (BIT:FUL) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, FullSix S.p.A. (BIT:FUL) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for FullSix

What Is FullSix's Net Debt?

As you can see below, FullSix had €2.08m of debt at September 2020, down from €3.57m a year prior. However, it does have €178.0k in cash offsetting this, leading to net debt of about €1.91m.

How Healthy Is FullSix's Balance Sheet?

The latest balance sheet data shows that FullSix had liabilities of €5.85m due within a year, and liabilities of €2.06m falling due after that. On the other hand, it had cash of €178.0k and €1.54m worth of receivables due within a year. So it has liabilities totalling €6.19m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since FullSix has a market capitalization of €14.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is FullSix's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year FullSix had a loss before interest and tax, and actually shrunk its revenue by 31%, to €5.4m. That makes us nervous, to say the least.

Caveat Emptor

While FullSix's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable €1.9m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €1.8m of cash over the last year. So suffice it to say we consider the stock very 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. Be aware that FullSix is showing 4 warning signs in our investment analysis , and 2 of those are concerning...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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