Here's Why Intred (BIT:ITD) Can Manage Its Debt Responsibly

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.' 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 Intred S.p.A. (BIT:ITD) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Intred

How Much Debt Does Intred Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Intred had €6.40m of debt, an increase on €1.83m, over one year. However, its balance sheet shows it holds €6.83m in cash, so it actually has €426.2k net cash.

How Strong Is Intred's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Intred had liabilities of €18.7m due within 12 months and liabilities of €6.53m due beyond that. Offsetting these obligations, it had cash of €6.83m as well as receivables valued at €6.02m due within 12 months. So its liabilities total €12.4m more than the combination of its cash and short-term receivables.

Since publicly traded Intred shares are worth a total of €232.2m, 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. While it does have liabilities worth noting, Intred also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Intred has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Intred'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 company can only pay off debt with cold hard cash, not accounting profits. While Intred 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. Over the last three years, Intred reported free cash flow worth 14% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Intred has €426.2k in net cash. And it impressed us with its EBIT growth of 42% over the last year. So we don't think Intred's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Intred you should know about.

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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