SG (BIT:SGC) makes moderate use of debt
Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, Company SG SpA (BIT:SGC) is in debt. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Check out our latest analysis for SG
What is SG’s net debt?
The image below, which you can click on for more details, shows that in December 2021, SG had a debt of 6.81 million euros, compared to 5.05 million euros in one year. However, because it has a cash reserve of €5.99m, its net debt is lower, at around €813.0k.
How strong is SG’s balance sheet?
The latest balance sheet data shows that SG had liabilities of €5.26 million due within the year and liabilities of €9.08 million due thereafter. On the other hand, it had €5.99 million in cash and €5.18 million in receivables at less than one year. Its liabilities therefore total €3.16 million more than the combination of its cash and short-term receivables.
This shortfall isn’t that bad as SG is worth €10.5m and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is ultimately the company’s future profitability that will decide whether SG can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Over 12 months, SG achieved a turnover of €12m, a gain of 9.3%, although it did not publish any earnings before interest and taxes. We generally like to see faster growth from unprofitable companies, but each in its own way.
It is important to note that SG recorded a loss of earnings before interest and taxes (EBIT) over the past year. Indeed, it lost €74k in terms of EBIT. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. Quite frankly, we think the track record falls short, although it could improve over time. Another reason for caution is that he lost €1.6m in negative free cash flow over the last twelve months. So suffice it to say that we consider the stock to be very risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that SG displays 3 warning signs in our investment analysis you should know…
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.