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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Unidata S.p.A. (BIT:UD) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Unidata's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Unidata had €5.38m of debt, an increase on €2.42m, over one year. But it also has €11.1m in cash to offset that, meaning it has €5.75m net cash.
A Look At Unidata's Liabilities
Zooming in on the latest balance sheet data, we can see that Unidata had liabilities of €19.2m due within 12 months and liabilities of €23.6m due beyond that. On the other hand, it had cash of €11.1m and €15.5m worth of receivables due within a year. So it has liabilities totalling €16.1m more than its cash and near-term receivables, combined.
Given Unidata has a market capitalization of €98.7m, it's hard to believe these liabilities pose much 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, Unidata also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that Unidata grew its EBIT by 150% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Unidata's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Unidata may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Unidata recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
While Unidata does have more liabilities than liquid assets, it also has net cash of €5.75m. And it impressed us with its EBIT growth of 150% over the last year. So we are not troubled with Unidata'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Unidata you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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