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 Basic-Fit N.V. (AMS:BFIT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Basic-Fit Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Basic-Fit had €612.8m of debt, an increase on €520.6m, over one year. However, it does have €70.4m in cash offsetting this, leading to net debt of about €542.4m.
How Strong Is Basic-Fit's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Basic-Fit had liabilities of €398.1m due within 12 months and liabilities of €1.57b due beyond that. Offsetting this, it had €70.4m in cash and €41.2m in receivables that were due within 12 months. So it has liabilities totalling €1.86b more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of €2.16b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Basic-Fit can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Basic-Fit had a loss before interest and tax, and actually shrunk its revenue by 27%, to €377m. That makes us nervous, to say the least.
While Basic-Fit's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost €131m 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 €117m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 1 warning sign for Basic-Fit that you should be aware of before investing here.
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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