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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Cellularline S.p.A. (BIT:CELL) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Cellularline
What Is Cellularline's Debt?
You can click the graphic below for the historical numbers, but it shows that Cellularline had €62.3m of debt in June 2019, down from €72.1m, one year before. On the flip side, it has €25.9m in cash leading to net debt of about €36.4m.
How Strong Is Cellularline's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Cellularline had liabilities of €40.5m due within 12 months and liabilities of €70.6m due beyond that. Offsetting these obligations, it had cash of €25.9m as well as receivables valued at €57.7m due within 12 months. So it has liabilities totalling €27.5m more than its cash and near-term receivables, combined.
Of course, Cellularline has a market capitalization of €141.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
While Cellularline's low debt to EBITDA ratio of 0.86 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 4.3 last year does give us pause. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Unfortunately, Cellularline saw its EBIT slide 9.5% in the last twelve months. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Cellularline's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.