Does Ratti (BIT: RAT) use debt in a risky way?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Ratti SpA (BIT: RAT) uses debt in its activities. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of a business with the ability to reinvest at high rates of return. The first step in examining a business’s debt levels is to consider its cash flow and debt together.
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What is Ratti’s net debt?
The image below, which you can click for more details, shows that in June 2021, Ratti had a debt of 47.9 million euros, up from 44.5 million euros in a year. However, it has 50.6 million euros of cash to compensate for this, leading to a net cash of 2.71 million euros.
Is Ratti’s track record healthy?
Zooming in on the latest balance sheet data, we can see that Ratti had a liability of € 39.0 million due within 12 months and a liability of € 42.8 million due beyond. On the other hand, it had cash of € 50.6 million and € 15.0 million in receivables within one year. It therefore has a total liability of € 16.3 million more than its combined cash and short-term receivables.
Considering that the listed Ratti shares are worth a total of 104.2 million euros, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. While he has some liabilities to note, Ratti also has more cash than debt, so we’re pretty confident he can handle his debt safely. The balance sheet is clearly the area to focus on when analyzing debt. But it is Ratti’s earnings that will influence how the balance sheet looks going in the future. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.
In the past year, Ratti has recorded a loss before interest and taxes and has actually reduced his income by 22%, to 70 million euros. To be frank, that doesn’t bode well.
So how risky is Ratti?
Although Ratti recorded a loss of profit before interest and taxes (EBIT) in the last twelve months, it generated positive free cash flow of 2.7 million euros. So, although it is in deficit, it does not appear to have too much short-term balance sheet risk, given the net cash position. Until we see positive EBIT, we remain a bit cautious about the stock, especially given the rather modest revenue growth. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Know that Ratti shows 1 warning sign in our investment analysis , you must know…
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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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 any stock 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 any of the stocks mentioned.