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. 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. As with many other companies Pininfarina S.p.A. (BIT:PINF) makes use of debt. But the real question is whether this debt is making the company risky.
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Pininfarina's Debt?
As you can see below, Pininfarina had €27.9m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have €27.0m in cash offsetting this, leading to net debt of about €887.8k.
A Look At Pininfarina's Liabilities
According to the last reported balance sheet, Pininfarina had liabilities of €44.5m due within 12 months, and liabilities of €33.8m due beyond 12 months. On the other hand, it had cash of €27.0m and €35.5m worth of receivables due within a year. So it has liabilities totalling €15.8m more than its cash and near-term receivables, combined.
Of course, Pininfarina has a market capitalization of €99.0m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Pininfarina has a very light debt load indeed. 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 Pininfarina'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 Pininfarina had negative earnings before interest and tax, and actually shrunk its revenue by 8.0%, to €94m. That's not what we would hope to see.
Over the last twelve months Pininfarina produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €3.6m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €4.3m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. For riskier companies like Pininfarina I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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