Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Lucisano Media Group S.p.A. (BIT:LMG) makes use of debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Lucisano Media Group
How Much Debt Does Lucisano Media Group Carry?
As you can see below, Lucisano Media Group had €27.0m of debt at December 2020, down from €29.3m a year prior. On the flip side, it has €7.57m in cash leading to net debt of about €19.4m.
How Strong Is Lucisano Media Group's Balance Sheet?
According to the last reported balance sheet, Lucisano Media Group had liabilities of €17.6m due within 12 months, and liabilities of €34.1m due beyond 12 months. On the other hand, it had cash of €7.57m and €35.9m worth of receivables due within a year. So it has liabilities totalling €8.24m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Lucisano Media Group is worth €20.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Lucisano Media Group shareholders face the double whammy of a high net debt to EBITDA ratio (19.0), and fairly weak interest coverage, since EBIT is just 0.26 times the interest expense. This means we'd consider it to have a heavy debt load. Even worse, Lucisano Media Group saw its EBIT tank 92% over the last 12 months. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lucisano Media Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
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, Lucisano Media Group saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Our View
To be frank both Lucisano Media Group's conversion of EBIT to free cash flow and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. Having said that, its ability to handle its total liabilities isn't such a worry. After considering the datapoints discussed, we think Lucisano Media Group has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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 example, we've discovered 4 warning signs for Lucisano Media Group (2 are a bit unpleasant!) that you should be aware of before investing here.
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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About BIT:LMG
Lucisano Media Group
Engages in the film production and cinema management activities in Italy.
High growth potential moderate.
