These 4 Measures Indicate That Unieuro (BIT:UNIR) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Unieuro S.p.A. (BIT:UNIR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Unieuro

What Is Unieuro's Debt?

As you can see below, Unieuro had €41.8m of debt at August 2021, down from €72.7m a year prior. But on the other hand it also has €138.6m in cash, leading to a €96.8m net cash position.

How Strong Is Unieuro's Balance Sheet?

According to the last reported balance sheet, Unieuro had liabilities of €928.8m due within 12 months, and liabilities of €435.6m due beyond 12 months. On the other hand, it had cash of €138.6m and €95.4m worth of receivables due within a year. So it has liabilities totalling €1.13b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €397.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Unieuro would probably need a major re-capitalization if its creditors were to demand repayment. Given that Unieuro has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Another good sign is that Unieuro has been able to increase its EBIT by 26% in twelve months, making it easier to pay down 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 Unieuro 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Unieuro may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Unieuro actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Unieuro's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €96.8m. And it impressed us with free cash flow of €140m, being 195% of its EBIT. So we are not troubled with Unieuro's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Unieuro (including 1 which is concerning) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.