Be Shaping The Future (BIT:BEST) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Be Shaping The Future S.p.A. (BIT:BEST) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Be Shaping The Future

How Much Debt Does Be Shaping The Future Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Be Shaping The Future had €56.7m of debt, an increase on €43.7m, over one year. However, it also had €35.4m in cash, and so its net debt is €21.3m.

How Healthy Is Be Shaping The Future's Balance Sheet?

We can see from the most recent balance sheet that Be Shaping The Future had liabilities of €86.0m falling due within a year, and liabilities of €62.4m due beyond that. Offsetting this, it had €35.4m in cash and €74.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €112.9m.

Be Shaping The Future has a market capitalization of €270.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Be Shaping The Future has a low net debt to EBITDA ratio of only 0.77. And its EBIT easily covers its interest expense, being 31.8 times the size. So we're pretty relaxed about its super-conservative use of debt. In addition to that, we're happy to report that Be Shaping The Future has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Be Shaping The Future 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Be Shaping The Future recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Our View

Be Shaping The Future's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Zooming out, Be Shaping The Future seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. 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. To that end, you should be aware of the 3 warning signs we've spotted with Be Shaping The Future .

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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