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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Caltagirone Editore SpA (BIT:CED) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Caltagirone Editore
What Is Caltagirone Editore's Net Debt?
As you can see below, Caltagirone Editore had €7.91m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have €111.7m in cash offsetting this, leading to net cash of €103.8m.
A Look At Caltagirone Editore's Liabilities
According to the last reported balance sheet, Caltagirone Editore had liabilities of €56.9m due within 12 months, and liabilities of €81.6m due beyond 12 months. Offsetting this, it had €111.7m in cash and €42.1m in receivables that were due within 12 months. So it actually has €15.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Caltagirone Editore could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Caltagirone Editore has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Caltagirone Editore 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.