Is Monrif (BIT:MON) Weighed On By Its Debt Load?

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.' 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 Monrif S.p.A. (BIT:MON) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Monrif

How Much Debt Does Monrif Carry?

The chart below, which you can click on for greater detail, shows that Monrif had €70.9m in debt in September 2021; about the same as the year before. However, because it has a cash reserve of €13.7m, its net debt is less, at about €57.2m.

How Strong Is Monrif's Balance Sheet?

According to the last reported balance sheet, Monrif had liabilities of €82.3m due within 12 months, and liabilities of €96.7m due beyond 12 months. Offsetting these obligations, it had cash of €13.7m as well as receivables valued at €545.0k due within 12 months. So it has liabilities totalling €164.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €12.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Monrif would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Monrif will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Monrif had a loss before interest and tax, and actually shrunk its revenue by 6.0%, to €143m. That's not what we would hope to see.

Caveat Emptor

Importantly, Monrif had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €608k. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost €6.5m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. For example Monrif has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.