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.' 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 note that S.C. Turism Felix S.A. (BVB:TUFE) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
Check out our latest analysis for S.C. Turism Felix
What Is S.C. Turism Felix's Net Debt?
As you can see below, at the end of June 2024, S.C. Turism Felix had RON51.3m of debt, up from RON31.8m a year ago. Click the image for more detail. On the flip side, it has RON4.91m in cash leading to net debt of about RON46.4m.
How Strong Is S.C. Turism Felix's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that S.C. Turism Felix had liabilities of RON36.6m due within 12 months and liabilities of RON49.3m due beyond that. Offsetting this, it had RON4.91m in cash and RON5.50m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RON75.5m.
While this might seem like a lot, it is not so bad since S.C. Turism Felix has a market capitalization of RON167.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is S.C. Turism Felix's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, S.C. Turism Felix saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
Caveat Emptor
Over the last twelve months S.C. Turism Felix produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at RON2.5m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RON12m in negative free cash flow over the last twelve months. 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. For example, we've discovered 3 warning signs for S.C. Turism Felix (1 is a bit unpleasant!) that you should be aware of before investing here.
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.
About BVB:TUFE
Low and overvalued.
