Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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. Importantly, TAS Tecnologia Avanzata dei Sistemi S.p.A. (BIT:TAS) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.
What Is TAS Tecnologia Avanzata dei Sistemi’s Net Debt?
The image below, which you can click on for greater detail, shows that at March 2019 TAS Tecnologia Avanzata dei Sistemi had debt of €8.84m, up from €6.39m in one year. But on the other hand it also has €8.87m in cash, leading to a €28.0k net cash position.
A Look At TAS Tecnologia Avanzata dei Sistemi’s Liabilities
The latest balance sheet data shows that TAS Tecnologia Avanzata dei Sistemi had liabilities of €34.9m due within a year, and liabilities of €20.5m falling due after that. Offsetting this, it had €8.87m in cash and €28.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €18.5m.
Since publicly traded TAS Tecnologia Avanzata dei Sistemi shares are worth a total of €153.7m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, TAS Tecnologia Avanzata dei Sistemi also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Notably, TAS Tecnologia Avanzata dei Sistemi’s EBIT launched higher than Elon Musk, gaining a whopping 1907% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But you can’t view debt in total isolation; since TAS Tecnologia Avanzata dei Sistemi will need earnings to service that debt. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While TAS Tecnologia Avanzata dei Sistemi 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. Looking at the most recent two years, TAS Tecnologia Avanzata dei Sistemi recorded free cash flow of 43% of its EBIT, which is weaker than we’d expect. That weak cash conversion makes it more difficult to handle indebtedness.
While TAS Tecnologia Avanzata dei Sistemi does have more liabilities than liquid assets, it also has net cash of €28k. And we liked the look of last year’s 1907% year-on-year EBIT growth. So we are not troubled with TAS Tecnologia Avanzata dei Sistemi’s debt use. Over time, share prices tend to follow earnings per share, so if you’re interested in TAS Tecnologia Avanzata dei Sistemi, you may well want to click here to check an interactive graph of its earnings per share history.
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 email@example.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.
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