Does Natuzzi (NYSE:NTZ) Have A Healthy Balance Sheet?

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. Importantly, Natuzzi S.p.A. (NYSE:NTZ) does carry debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Natuzzi's Debt?

As you can see below, at the end of December 2024, Natuzzi had €42.5m of debt, up from €40.2m a year ago. Click the image for more detail. However, it does have €20.3m in cash offsetting this, leading to net debt of about €22.2m.

How Strong Is Natuzzi's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Natuzzi had liabilities of €158.3m due within 12 months and liabilities of €102.5m due beyond that. On the other hand, it had cash of €20.3m and €46.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €194.1m.

This deficit casts a shadow over the €34.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Natuzzi 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 Natuzzi will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for Natuzzi

Over 12 months, Natuzzi made a loss at the EBIT level, and saw its revenue drop to €319m, which is a fall of 3.0%. That's not what we would hope to see.

Caveat Emptor

Importantly, Natuzzi had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €1.9m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized €5.4m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. We've identified 2 warning signs with Natuzzi , 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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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.