These 4 Measures Indicate That Infrastrutture Wireless Italiane (BIT:INW) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Infrastrutture Wireless Italiane S.p.A. (BIT:INW) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Infrastrutture Wireless Italiane

What Is Infrastrutture Wireless Italiane's Debt?

The chart below, which you can click on for greater detail, shows that Infrastrutture Wireless Italiane had €3.26b in debt in September 2022; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

A Look At Infrastrutture Wireless Italiane's Liabilities

We can see from the most recent balance sheet that Infrastrutture Wireless Italiane had liabilities of €559.5m falling due within a year, and liabilities of €4.31b due beyond that. On the other hand, it had cash of €38.0m and €209.4m worth of receivables due within a year. So it has liabilities totalling €4.62b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Infrastrutture Wireless Italiane is worth a massive €9.62b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Infrastrutture Wireless Italiane has a rather high debt to EBITDA ratio of 5.5 which suggests a meaningful debt load. However, its interest coverage of 5.6 is reasonably strong, which is a good sign. If Infrastrutture Wireless Italiane can keep growing EBIT at last year's rate of 16% over the last year, then it will find its debt load easier to manage. 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 Infrastrutture Wireless Italiane can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Infrastrutture Wireless Italiane produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

When it comes to the balance sheet, the standout positive for Infrastrutture Wireless Italiane was the fact that it seems able to convert EBIT to free cash flow confidently. However, our other observations weren't so heartening. In particular, net debt to EBITDA gives us cold feet. Considering this range of data points, we think Infrastrutture Wireless Italiane is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Infrastrutture Wireless Italiane (of which 1 is a bit unpleasant!) you should know about.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.