Warren Buffett famously said, '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. As with many other companies MailUp S.p.A. (BIT:MAIL) makes use of debt. 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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
See our latest analysis for MailUp
What Is MailUp's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2020 MailUp had debt of €2.80m, up from €1.65m in one year. But it also has €10.4m in cash to offset that, meaning it has €7.60m net cash.
How Healthy Is MailUp's Balance Sheet?
According to the last reported balance sheet, MailUp had liabilities of €26.5m due within 12 months, and liabilities of €10.2m due beyond 12 months. Offsetting this, it had €10.4m in cash and €14.3m in receivables that were due within 12 months. So its liabilities total €12.1m more than the combination of its cash and short-term receivables.
Of course, MailUp has a market capitalization of €69.0m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, MailUp also has more cash than debt, so we're pretty confident it can manage its debt safely.
On the other hand, MailUp saw its EBIT drop by 7.8% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine MailUp'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While MailUp 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. Looking at the most recent three years, MailUp recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing up
While MailUp does have more liabilities than liquid assets, it also has net cash of €7.60m. So we are not troubled with MailUp's debt use. 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 1 warning sign we've spotted with MailUp .
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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This article by Simply Wall St is general in nature. 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.
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About BIT:GROW
Growens
Engages in the cloud marketing technology business in Italy, other European countries, the Americas, and Asia.
Fair value with mediocre balance sheet.
