Is Notorious Pictures (BIT:NPI) Using Too Much 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.' 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. As with many other companies Notorious Pictures S.p.A. (BIT:NPI) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Notorious Pictures

How Much Debt Does Notorious Pictures Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Notorious Pictures had €11.2m of debt, an increase on €10.6m, over one year. However, it also had €10.5m in cash, and so its net debt is €649.0k.

How Healthy Is Notorious Pictures' Balance Sheet?

According to the last reported balance sheet, Notorious Pictures had liabilities of €11.5m due within 12 months, and liabilities of €22.7m due beyond 12 months. Offsetting this, it had €10.5m in cash and €20.6m in receivables that were due within 12 months. So its liabilities total €3.00m more than the combination of its cash and short-term receivables.

Of course, Notorious Pictures has a market capitalization of €38.8m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Notorious Pictures 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 Notorious Pictures had a loss before interest and tax, and actually shrunk its revenue by 69%, to €14m. To be frank that doesn't bode well.

Caveat Emptor

While Notorious Pictures'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 €3.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of €2.1m. So in short it's a really risky stock. 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 - Notorious Pictures has 2 warning signs we think 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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