Is Brioschi Sviluppo Immobiliare (BIT:BRI) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Brioschi Sviluppo Immobiliare S.p.A. (BIT:BRI) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Brioschi Sviluppo Immobiliare

How Much Debt Does Brioschi Sviluppo Immobiliare Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Brioschi Sviluppo Immobiliare had €124.2m of debt, an increase on €108.8m, over one year. However, it does have €5.24m in cash offsetting this, leading to net debt of about €119.0m.

How Healthy Is Brioschi Sviluppo Immobiliare's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Brioschi Sviluppo Immobiliare had liabilities of €102.5m due within 12 months and liabilities of €105.2m due beyond that. Offsetting these obligations, it had cash of €5.24m as well as receivables valued at €15.3m due within 12 months. So its liabilities total €187.1m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €55.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Brioschi Sviluppo Immobiliare 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 it is Brioschi Sviluppo Immobiliare's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Brioschi Sviluppo Immobiliare had a loss before interest and tax, and actually shrunk its revenue by 15%, to €15m. That's not what we would hope to see.

Caveat Emptor

Not only did Brioschi Sviluppo Immobiliare's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €5.4m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through €26m in the last year. 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. Take risks, for example - Brioschi Sviluppo Immobiliare has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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