Is Italian Exhibition Group (BIT:IEG) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Italian Exhibition Group S.p.A. (BIT:IEG) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Italian Exhibition Group

What Is Italian Exhibition Group's Net Debt?

As you can see below, Italian Exhibition Group had €131.8m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of €52.7m, its net debt is less, at about €79.2m.

How Strong Is Italian Exhibition Group's Balance Sheet?

According to the last reported balance sheet, Italian Exhibition Group had liabilities of €100.5m due within 12 months, and liabilities of €136.4m due beyond 12 months. On the other hand, it had cash of €52.7m and €27.3m worth of receivables due within a year. So it has liabilities totalling €157.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €73.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Italian Exhibition Group would probably need a major re-capitalization if its creditors were to demand repayment. 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 Italian Exhibition Group 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.

In the last year Italian Exhibition Group had a loss before interest and tax, and actually shrunk its revenue by 4.9%, to €74m. That's not what we would hope to see.

Caveat Emptor

Importantly, Italian Exhibition Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €22m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. But on the bright side the company actually produced a statutory profit of €1.6m and free cash flow of €29m. So one might argue that there's still a chance it can get things on the right track. 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 3 warning signs with Italian Exhibition Group , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.