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.' 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 Blue Financial Communication S.p.A. (BIT:BLUE) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Blue Financial Communication
How Much Debt Does Blue Financial Communication Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 Blue Financial Communication had €1.10m of debt, an increase on €775.8k, over one year. However, because it has a cash reserve of €755.7k, its net debt is less, at about €344.3k.
How Strong Is Blue Financial Communication's Balance Sheet?
According to the last reported balance sheet, Blue Financial Communication had liabilities of €1.34m due within 12 months, and liabilities of €1.14m due beyond 12 months. Offsetting these obligations, it had cash of €755.7k as well as receivables valued at €1.54m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €189.6k.
Given Blue Financial Communication has a market capitalization of €3.56m, it's hard to believe these liabilities pose much threat. 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). 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).