Is Risanamento (BIT:RN) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Risanamento SpA (BIT:RN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Risanamento

What Is Risanamento's Debt?

The chart below, which you can click on for greater detail, shows that Risanamento had €470.4m in debt in September 2020; about the same as the year before. And it doesn't have much cash, so its net debt is about the same.

A Look At Risanamento's Liabilities

The latest balance sheet data shows that Risanamento had liabilities of €28.6m due within a year, and liabilities of €565.3m falling due after that. On the other hand, it had cash of €6.26m and €5.71m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €581.9m.

This deficit casts a shadow over the €95.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Risanamento would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Risanamento'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.

Over 12 months, Risanamento made a loss at the EBIT level, and saw its revenue drop to €3.1m, which is a fall of 77%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Risanamento's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable €17m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the fact is that it incinerated €29m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Risanamento you should be aware of, and 1 of them makes us a bit uncomfortable.

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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