These 4 Measures Indicate That Be Shaping The Future (BIT:BEST) Is Using Debt Reasonably Well

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.' 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 Be Shaping The Future S.p.A. (BIT:BEST) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Be Shaping The Future

What Is Be Shaping The Future's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Be Shaping The Future had €42.8m of debt, an increase on €35.9m, over one year. However, because it has a cash reserve of €15.6m, its net debt is less, at about €27.2m.

A Look At Be Shaping The Future's Liabilities

Zooming in on the latest balance sheet data, we can see that Be Shaping The Future had liabilities of €63.0m due within 12 months and liabilities of €53.1m due beyond that. Offsetting this, it had €15.6m in cash and €52.3m in receivables that were due within 12 months. So its liabilities total €48.2m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Be Shaping The Future has a market capitalization of €194.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Be Shaping The Future has a low net debt to EBITDA ratio of only 1.3. And its EBIT covers its interest expense a whopping 21.2 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also good is that Be Shaping The Future grew its EBIT at 13% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, Be Shaping The Future recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 we also thought its EBIT growth rate was a positive. Looking at all the aforementioned factors together, it strikes us that Be Shaping The Future can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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. Take risks, for example - Be Shaping The Future has 3 warning signs we think you should be aware of.

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.

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