Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Barbara Bui SA (EPA:BUI) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Barbara Bui's Net Debt?
As you can see below, Barbara Bui had €388.0k of debt at December 2018, down from €2.14m a year prior. But on the other hand it also has €3.62m in cash, leading to a €3.23m net cash position.
A Look At Barbara Bui's Liabilities
According to the last reported balance sheet, Barbara Bui had liabilities of €3.46m due within 12 months, and liabilities of €191.0k due beyond 12 months. On the other hand, it had cash of €3.62m and €1.63m worth of receivables due within a year. So it can boast €1.60m more liquid assets than total liabilities.
This surplus suggests that Barbara Bui is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Barbara Bui has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Barbara Bui's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Barbara Bui managed to grow its revenue by 2.0%, to €14m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Barbara Bui?
While Barbara Bui lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of €2.7m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. For riskier companies like Barbara Bui 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.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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