Here's Why Juventus Football Club (BIT:JUVE) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Juventus Football Club S.p.A. (BIT:JUVE) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for Juventus Football Club

How Much Debt Does Juventus Football Club Carry?

You can click the graphic below for the historical numbers, but it shows that Juventus Football Club had €369.1m of debt in December 2020, down from €448.7m, one year before. However, it does have €49.3m in cash offsetting this, leading to net debt of about €319.8m.

How Healthy Is Juventus Football Club's Balance Sheet?

We can see from the most recent balance sheet that Juventus Football Club had liabilities of €366.0m falling due within a year, and liabilities of €485.3m due beyond that. On the other hand, it had cash of €49.3m and €116.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €685.4m.

This is a mountain of leverage relative to its market capitalization of €956.5m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Juventus Football Club can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Juventus Football Club made a loss at the EBIT level, and saw its revenue drop to €499m, which is a fall of 17%. We would much prefer see growth.

Caveat Emptor

While Juventus Football Club'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 €120m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €84m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Juventus Football Club (1 is significant) 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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