Here's Why Basic-Fit (AMS:BFIT) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Basic-Fit N.V. (AMS:BFIT) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Basic-Fit

What Is Basic-Fit's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Basic-Fit had €629.6m of debt, an increase on €591.1m, over one year. However, because it has a cash reserve of €207.3m, its net debt is less, at about €422.3m.

How Healthy Is Basic-Fit's Balance Sheet?

We can see from the most recent balance sheet that Basic-Fit had liabilities of €446.6m falling due within a year, and liabilities of €1.60b due beyond that. On the other hand, it had cash of €207.3m and €41.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.80b.

This deficit is considerable relative to its market capitalization of €2.63b, so it does suggest shareholders should keep an eye on Basic-Fit's use of debt. 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 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Basic-Fit made a loss at the EBIT level, and saw its revenue drop to €247m, which is a fall of 46%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Basic-Fit's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €243m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €190m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Basic-Fit , and understanding them should be part of your investment process.

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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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.
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