The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, TAS Tecnologia Avanzata dei Sistemi S.p.A. (BIT:TAS) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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 TAS Tecnologia Avanzata dei Sistemi’s 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 it also has €8.87m in cash to offset that, meaning it has €28.0k net cash.
How Strong Is TAS Tecnologia Avanzata dei Sistemi’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that TAS Tecnologia Avanzata dei Sistemi had liabilities of €34.9m due within 12 months and liabilities of €20.5m due beyond 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.
Given TAS Tecnologia Avanzata dei Sistemi has a market capitalization of €155.4m, it’s hard to believe these liabilities pose much 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 it impressed us with its EBIT growth of 1907% over the last year. 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.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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