Health Check: How Prudently Does Il Sole 24 ORE (BIT:S24) Use Debt?

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. Importantly, Il Sole 24 ORE S.p.A. (BIT:S24) 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Il Sole 24 ORE

How Much Debt Does Il Sole 24 ORE Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Il Sole 24 ORE had €54.7m of debt, an increase on €15.2m, over one year. On the flip side, it has €28.9m in cash leading to net debt of about €25.7m.

How Strong Is Il Sole 24 ORE's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Il Sole 24 ORE had liabilities of €107.3m due within 12 months and liabilities of €83.7m due beyond that. On the other hand, it had cash of €28.9m and €51.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €110.8m.

This deficit casts a shadow over the €30.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Il Sole 24 ORE would likely require a major re-capitalisation if it had to pay its creditors today. 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 Il Sole 24 ORE 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, Il Sole 24 ORE made a loss at the EBIT level, and saw its revenue drop to €188m, which is a fall of 7.9%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Il Sole 24 ORE produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €2.2m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized €6.5m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Il Sole 24 ORE 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. 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.
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