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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. As with many other companies Biesse S.p.A. (BIT:BSS) makes use of 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Biesse
What Is Biesse's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Biesse had debt of €85.0m, up from €74.7m in one year. However, it does have €82.0m in cash offsetting this, leading to net debt of about €2.99m.
A Look At Biesse's Liabilities
We can see from the most recent balance sheet that Biesse had liabilities of €353.6m falling due within a year, and liabilities of €87.7m due beyond that. Offsetting these obligations, it had cash of €82.0m as well as receivables valued at €148.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €210.9m.
This deficit is considerable relative to its market capitalization of €282.7m, so it does suggest shareholders should keep an eye on Biesse's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. But either way, Biesse has virtually no net debt, so it's fair to say it does not have a heavy debt load!
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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).