Is Basic-Fit (AMS:BFIT) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Basic-Fit N.V. (AMS:BFIT) does carry debt. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Basic-Fit

How Much Debt Does Basic-Fit Carry?

The chart below, which you can click on for greater detail, shows that Basic-Fit had €619.6m in debt in December 2021; about the same as the year before. However, it does have €70.1m in cash offsetting this, leading to net debt of about €549.5m.

How Healthy Is Basic-Fit's Balance Sheet?

We can see from the most recent balance sheet that Basic-Fit had liabilities of €509.3m falling due within a year, and liabilities of €1.63b due beyond that. Offsetting these obligations, it had cash of €70.1m as well as receivables valued at €62.7m due within 12 months. So it has liabilities totalling €2.00b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €2.30b. 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 had a loss before interest and tax, and actually shrunk its revenue by 9.6%, to €341m. We would much prefer see growth.

Caveat Emptor

Importantly, Basic-Fit had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €204m. 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 €103m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Basic-Fit .

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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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.