SG (BIT:SGC) Is Making Moderate Use Of Debt

Published
June 05, 2022
BIT:SGC
Source: Shutterstock

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, SG Company S.p.A. (BIT:SGC) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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.

Check out our latest analysis for SG

What Is SG's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 SG had debt of €6.81m, up from €5.05m in one year. However, because it has a cash reserve of €5.99m, its net debt is less, at about €813.0k.

debt-equity-history-analysis
BIT:SGC Debt to Equity History June 5th 2022

How Strong Is SG's Balance Sheet?

The latest balance sheet data shows that SG had liabilities of €5.26m due within a year, and liabilities of €9.08m falling due after that. On the other hand, it had cash of €5.99m and €5.18m worth of receivables due within a year. So its liabilities total €3.16m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because SG is worth €10.5m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SG 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.

Over 12 months, SG reported revenue of €12m, which is a gain of 9.3%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, SG had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €74k 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. Another cause for caution is that is bled €1.6m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Be aware that SG is showing 3 warning signs in our investment analysis , you should know about...

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:SGC

SG

SG Company S.p.A. provides live and digital communication services for business to business, business to consumer, and below the line markets.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation1
Future Growth5
Past Performance0
Financial Health4
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

High growth potential with adequate balance sheet.