Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Inapa - Investimentos, Participações e Gestão, S.A. (ELI:INA) makes use of debt. But the real question is whether this debt is making the company risky.
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 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Inapa - Investimentos Participações e Gestão's Net Debt?
As you can see below, Inapa - Investimentos Participações e Gestão had €270.5m of debt at December 2020, down from €315.4m a year prior. On the flip side, it has €9.35m in cash leading to net debt of about €261.1m.
How Healthy Is Inapa - Investimentos Participações e Gestão's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Inapa - Investimentos Participações e Gestão had liabilities of €272.2m due within 12 months and liabilities of €300.6m due beyond that. Offsetting these obligations, it had cash of €9.35m as well as receivables valued at €127.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €435.9m.
This deficit casts a shadow over the €20.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Inapa - Investimentos Participações e Gestão would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Inapa - Investimentos Participações e Gestão will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Inapa - Investimentos Participações e Gestão saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.
Importantly, Inapa - Investimentos Participações e Gestão had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €2.7m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost €15m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. We've identified 2 warning signs with Inapa - Investimentos Participações e Gestão (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.
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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