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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Fidia S.p.A. (BIT:FDA) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Fidia
What Is Fidia's Net Debt?
The image below, which you can click on for greater detail, shows that Fidia had debt of €12.5m at the end of June 2019, a reduction from €17.9m over a year. However, because it has a cash reserve of €3.19m, its net debt is less, at about €9.35m.
How Healthy Is Fidia's Balance Sheet?
The latest balance sheet data shows that Fidia had liabilities of €38.1m due within a year, and liabilities of €11.2m falling due after that. Offsetting these obligations, it had cash of €3.19m as well as receivables valued at €16.4m due within 12 months. So its liabilities total €29.6m more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's €20.4m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Fidia's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Fidia wasn't profitable at an EBIT level, but managed to grow its revenue by3.3%, to €56m. We usually like to see faster growth from unprofitable companies, but each to their own.