These 4 Measures Indicate That MailUp (BIT:MAIL) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies MailUp S.p.A. (BIT:MAIL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for MailUp

How Much Debt Does MailUp Carry?

As you can see below, at the end of December 2020, MailUp had €3.63m of debt, up from €2.44m a year ago. Click the image for more detail. However, it does have €9.87m in cash offsetting this, leading to net cash of €6.24m.

How Healthy Is MailUp's Balance Sheet?

The latest balance sheet data shows that MailUp had liabilities of €24.7m due within a year, and liabilities of €7.95m falling due after that. Offsetting this, it had €9.87m in cash and €12.8m in receivables that were due within 12 months. So it has liabilities totalling €10.0m more than its cash and near-term receivables, combined.

Since publicly traded MailUp shares are worth a total of €62.9m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, MailUp boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that MailUp's load is not too heavy, because its EBIT was down 25% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 35% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While MailUp does have more liabilities than liquid assets, it also has net cash of €6.24m. So while MailUp does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with MailUp , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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