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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. We note that Risanamento SpA (BIT:RN) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Risanamento
What Is Risanamento's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Risanamento had €459.4m of debt, an increase on €431.4m, over one year. And it doesn't have much cash, so its net debt is about the same.
A Look At Risanamento's Liabilities
The latest balance sheet data shows that Risanamento had liabilities of €264.6m due within a year, and liabilities of €550.4m falling due after that. Offsetting this, it had €4.58m in cash and €6.61m in receivables that were due within 12 months. So its liabilities total €803.8m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the €66.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we definitely think shareholders need to watch this one closely. At the end of the day, Risanamento would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Risanamento 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.
Over 12 months, Risanamento reported revenue of €2.9m, which is a gain of 7.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.