Is Italtile (JSE:ITE) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Italtile Limited (JSE:ITE) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Italtile

How Much Debt Does Italtile Carry?

The image below, which you can click on for greater detail, shows that Italtile had debt of R508.0m at the end of December 2020, a reduction from R754.0m over a year. However, it does have R1.13b in cash offsetting this, leading to net cash of R626.0m.

A Look At Italtile's Liabilities

The latest balance sheet data shows that Italtile had liabilities of R1.35b due within a year, and liabilities of R525.0m falling due after that. On the other hand, it had cash of R1.13b and R1.10b worth of receivables due within a year. So it can boast R352.0m more liquid assets than total liabilities.

Having regard to Italtile's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the R20.4b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Italtile boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Italtile grew its EBIT by 2.3% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Italtile 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Italtile has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Italtile produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Italtile has R626.0m in net cash and a decent-looking balance sheet. So is Italtile's debt a risk? It doesn't seem so to us. 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 Italtile .

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. 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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