We Think Fine Foods & Pharmaceuticals N.T.M (BIT:FF) Can Stay On Top Of Its Debt
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Fine Foods & Pharmaceuticals N.T.M. S.p.A. (BIT:FF) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Fine Foods & Pharmaceuticals N.T.M
What Is Fine Foods & Pharmaceuticals N.T.M's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Fine Foods & Pharmaceuticals N.T.M had €31.5m of debt, an increase on €1.6k, over one year. But on the other hand it also has €70.4m in cash, leading to a €38.9m net cash position.
A Look At Fine Foods & Pharmaceuticals N.T.M's Liabilities
According to the last reported balance sheet, Fine Foods & Pharmaceuticals N.T.M had liabilities of €48.1m due within 12 months, and liabilities of €20.1m due beyond 12 months. On the other hand, it had cash of €70.4m and €26.9m worth of receivables due within a year. So it actually has €29.1m more liquid assets than total liabilities.
This surplus suggests that Fine Foods & Pharmaceuticals N.T.M is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Fine Foods & Pharmaceuticals N.T.M has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Fine Foods & Pharmaceuticals N.T.M grew its EBIT by 140% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Fine Foods & Pharmaceuticals N.T.M'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Fine Foods & Pharmaceuticals N.T.M has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, Fine Foods & Pharmaceuticals N.T.M burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Fine Foods & Pharmaceuticals N.T.M has net cash of €38.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 140% over the last year. So we don't think Fine Foods & Pharmaceuticals N.T.M's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Fine Foods & Pharmaceuticals N.T.M's earnings per share history for free.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
