Is Compagnia dei Caraibi (BIT:TIME) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Compagnia dei Caraibi S.p.A. (BIT:TIME) does carry debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Compagnia dei Caraibi's Net Debt?

As you can see below, Compagnia dei Caraibi had €12.8m of debt at December 2024, down from €14.7m a year prior. However, because it has a cash reserve of €1.80m, its net debt is less, at about €11.0m.

A Look At Compagnia dei Caraibi's Liabilities

We can see from the most recent balance sheet that Compagnia dei Caraibi had liabilities of €23.3m falling due within a year, and liabilities of €11.7m due beyond that. Offsetting this, it had €1.80m in cash and €13.0m in receivables that were due within 12 months. So its liabilities total €20.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €4.23m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Compagnia dei Caraibi 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 future earnings, more than anything, that will determine Compagnia dei Caraibi'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.

Check out our latest analysis for Compagnia dei Caraibi

Over 12 months, Compagnia dei Caraibi reported revenue of €59m, which is a gain of 12%, 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, Compagnia dei Caraibi had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €1.8m. 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 €706k 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Compagnia dei Caraibi has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.