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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Piovan S.p.A. (BIT:PVN) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Piovan
What Is Piovan's Net Debt?
As you can see below, at the end of March 2019, Piovan had €39.6m of debt, up from €35.6m a year ago. Click the image for more detail. On the flip side, it has €37.3m in cash leading to net debt of about €2.33m.
A Look At Piovan's Liabilities
According to the last reported balance sheet, Piovan had liabilities of €95.3m due within 12 months, and liabilities of €27.4m due beyond 12 months. On the other hand, it had cash of €37.3m and €63.3m worth of receivables due within a year. So its liabilities total €22.2m more than the combination of its cash and short-term receivables.
Of course, Piovan has a market capitalization of €323.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Piovan has a very light debt load indeed.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Piovan has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.063 and EBIT of 603 times the interest expense. So relative to past earnings, the debt load seems trivial. Also good is that Piovan grew its EBIT at 17% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Piovan's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.