Is Fine Foods & Pharmaceuticals N.T.M (BIT:FF) Using Too Much 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Fine Foods & Pharmaceuticals N.T.M. S.p.A. (BIT:FF) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fine Foods & Pharmaceuticals N.T.M

What Is Fine Foods & Pharmaceuticals N.T.M's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Fine Foods & Pharmaceuticals N.T.M had debt of €34.0m, up from €31.5m in one year. However, it does have €68.9m in cash offsetting this, leading to net cash of €34.9m.

How Healthy Is Fine Foods & Pharmaceuticals N.T.M's Balance Sheet?

We can see from the most recent balance sheet that Fine Foods & Pharmaceuticals N.T.M had liabilities of €41.2m falling due within a year, and liabilities of €25.0m due beyond that. Offsetting this, it had €68.9m in cash and €25.4m in receivables that were due within 12 months. So it actually has €28.0m more liquid assets than total liabilities.

This surplus suggests that Fine Foods & Pharmaceuticals N.T.M has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Fine Foods & Pharmaceuticals N.T.M has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Fine Foods & Pharmaceuticals N.T.M's saving grace is its low debt levels, because its EBIT has tanked 58% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Fine Foods & Pharmaceuticals N.T.M'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Fine Foods & Pharmaceuticals N.T.M has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Fine Foods & Pharmaceuticals N.T.M burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Fine Foods & Pharmaceuticals N.T.M has net cash of €34.9m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Fine Foods & Pharmaceuticals N.T.M's balance sheet. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Fine Foods & Pharmaceuticals N.T.M , and understanding them should be part of your investment process.

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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