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

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

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Be Shaping The Future

How Much Debt Does Be Shaping The Future Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Be Shaping The Future had debt of €47.5m, up from €36.5m in one year. But it also has €60.6m in cash to offset that, meaning it has €13.0m net cash.

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

The latest balance sheet data shows that Be Shaping The Future had liabilities of €89.4m due within a year, and liabilities of €55.2m falling due after that. Offsetting this, it had €60.6m in cash and €36.3m in receivables that were due within 12 months. So it has liabilities totalling €47.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Be Shaping The Future has a market capitalization of €198.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Be Shaping The Future boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Be Shaping The Future grew its EBIT at 19% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Be Shaping The Future'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Be Shaping The Future 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, Be Shaping The Future 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

While Be Shaping The Future does have more liabilities than liquid assets, it also has net cash of €13.0m. And it impressed us with free cash flow of €27m, being 131% of its EBIT. So we don't think Be Shaping The Future's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Be Shaping The Future , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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