These 4 Measures Indicate That Techedge (BIT:EDGE) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. 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 Techedge S.p.A. (BIT:EDGE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Techedge

What Is Techedge's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Techedge had €24.6m of debt in December 2019, down from €27.4m, one year before. But it also has €34.7m in cash to offset that, meaning it has €10.0m net cash.

A Look At Techedge's Liabilities

According to the last reported balance sheet, Techedge had liabilities of €59.2m due within 12 months, and liabilities of €27.6m due beyond 12 months. On the other hand, it had cash of €34.7m and €70.4m worth of receivables due within a year. So it actually has €18.3m more liquid assets than total liabilities.

This surplus suggests that Techedge is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Techedge has more cash than debt is arguably a good indication that it can manage its debt safely.

Techedge's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Techedge's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Techedge has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Techedge produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Techedge has €10.0m in net cash and a decent-looking balance sheet. So we don't think Techedge's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Techedge insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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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