Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Basic-Fit NV (AMS: BFIT) uses debt in its business. But does this debt concern shareholders?
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal finance debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Basic-Fit
What is Basic-Fit Debt?
You can click on the graph below for historical figures, but it shows that as of June 2021 Basic-Fit had 629.6 million euros in debt, an increase from 591.1 million euros. , over one year. However, because it has a cash reserve of € 207.3 million, its net debt is lower, at around € 422.3 million.
How healthy is Basic-Fit’s track record?
We can see from the most recent balance sheet that Basic-Fit had a liability of 446.6 million euros due within one year and a liability of 1.60 billion euros due beyond. On the other hand, it had cash of € 207.3 million and € 41.7 million in receivables within one year. Its liabilities thus exceed the sum of its cash and its receivables (short term) by 1.80 billion euros.
This deficit is sizable compared to its market capitalization of 2.63 billion euros, so he suggests shareholders keep an eye on Basic-Fit’s use of debt. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Basic-Fit’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Over 12 months, Basic-Fit recorded a loss in EBIT and saw its turnover fall to € 247 million, a decrease of 46%. To be frank, that doesn’t bode well.
Emptor Warning
Not only has Basic-Fit’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to 243 million euros. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. We therefore believe that its record is a bit strained, but not irreparable. However, it doesn’t help that he spent 190 million euros in cash in the past year. In short, it’s a really risky title. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 1 warning sign with Basic-Fit and understanding them should be part of your investment process.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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