Is Piquadro (BIT:PQ) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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, Piquadro S.p.A. (BIT:PQ) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Piquadro

What Is Piquadro's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2019 Piquadro had €21.4m of debt, an increase on €23.7, over one year. But on the other hand it also has €36.4m in cash, leading to a €15.0m net cash position.

A Look At Piquadro's Liabilities

The latest balance sheet data shows that Piquadro had liabilities of €77.7m due within a year, and liabilities of €75.7m falling due after that. Offsetting this, it had €36.4m in cash and €50.0m in receivables that were due within 12 months. So it has liabilities totalling €67.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Piquadro is worth €120.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Piquadro boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Piquadro's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Piquadro reported revenue of €160m, which is a gain of 35%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Piquadro?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Piquadro had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of €5.6m and booked a €6.7m accounting loss. With only €15.0m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Piquadro may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Piquadro has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.

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. Thank you for reading.