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 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, Openjobmetis S.p.A. (BIT:OJM) does carry debt. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Openjobmetis
How Much Debt Does Openjobmetis Carry?
As you can see below, Openjobmetis had €24.3m of debt at June 2019, down from €25.9m a year prior. However, because it has a cash reserve of €7.36m, its net debt is less, at about €16.9m.
A Look At Openjobmetis's Liabilities
We can see from the most recent balance sheet that Openjobmetis had liabilities of €109.4m falling due within a year, and liabilities of €21.8m due beyond that. On the other hand, it had cash of €7.36m and €122.5m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.
Having regard to Openjobmetis's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €90.7m company is short on cash, but still worth keeping an eye on the balance sheet.
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.
Openjobmetis has a low net debt to EBITDA ratio of only 0.97. And its EBIT covers its interest expense a whopping 26.7 times over. So we're pretty relaxed about its super-conservative use of debt. On the other hand, Openjobmetis saw its EBIT drop by 9.1% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Openjobmetis can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.