Basic-Fit (AMS:BFIT) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Basic-Fit N.V. (AMS:BFIT) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Basic-Fit

What Is Basic-Fit's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Basic-Fit had debt of €591.1m, up from €413.7m in one year. However, because it has a cash reserve of €189.5m, its net debt is less, at about €401.6m.

How Strong Is Basic-Fit's Balance Sheet?

The latest balance sheet data shows that Basic-Fit had liabilities of €324.8m due within a year, and liabilities of €1.49b falling due after that. On the other hand, it had cash of €189.5m and €45.9m worth of receivables due within a year. So it has liabilities totalling €1.58b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €1.90b, so it does suggest shareholders should keep an eye on Basic-Fit's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Basic-Fit'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.

In the last year Basic-Fit's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Basic-Fit had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €16m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €39m of cash over the last year. So to be blunt we think it is risky. 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. Case in point: We've spotted 2 warning signs for Basic-Fit you should be aware of.

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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