Iervolino & Lady Bacardi Entertainment (BIT:IE) Has A Pretty Healthy Balance Sheet

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 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 can see that Iervolino & Lady Bacardi Entertainment S.p.A. (BIT:IE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Iervolino & Lady Bacardi Entertainment

How Much Debt Does Iervolino & Lady Bacardi Entertainment Carry?

The image below, which you can click on for greater detail, shows that at December 2021 Iervolino & Lady Bacardi Entertainment had debt of €44.6m, up from €23.5m in one year. However, it also had €13.2m in cash, and so its net debt is €31.4m.

A Look At Iervolino & Lady Bacardi Entertainment's Liabilities

According to the last reported balance sheet, Iervolino & Lady Bacardi Entertainment had liabilities of €59.9m due within 12 months, and liabilities of €33.7m due beyond 12 months. Offsetting these obligations, it had cash of €13.2m as well as receivables valued at €50.7m due within 12 months. So its liabilities total €29.7m more than the combination of its cash and short-term receivables.

Iervolino & Lady Bacardi Entertainment has a market capitalization of €58.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Iervolino & Lady Bacardi Entertainment has a low net debt to EBITDA ratio of only 0.23. And its EBIT covers its interest expense a whopping 27.5 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In addition to that, we're happy to report that Iervolino & Lady Bacardi Entertainment has boosted its EBIT by 75%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Iervolino & Lady Bacardi Entertainment 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Iervolino & Lady Bacardi Entertainment saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Based on what we've seen Iervolino & Lady Bacardi Entertainment is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its interest cover. When we consider all the elements mentioned above, it seems to us that Iervolino & Lady Bacardi Entertainment is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Iervolino & Lady Bacardi Entertainment (2 shouldn't be ignored) you should be aware of.

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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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.