Health Check: How Prudently Does A.S. Roma (BIT:ASR) Use Debt?
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. As with many other companies A.S. Roma S.P.A. (BIT:ASR) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for A.S. Roma
What Is A.S. Roma's Net Debt?
You can click the graphic below for the historical numbers, but it shows that A.S. Roma had €258.1m of debt in December 2018, down from €274.0m, one year before. On the flip side, it has €44.9m in cash leading to net debt of about €213.1m.
How Healthy Is A.S. Roma's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that A.S. Roma had liabilities of €289.0m due within 12 months and liabilities of €335.9m due beyond that. Offsetting these obligations, it had cash of €44.9m as well as receivables valued at €113.0m due within 12 months. So it has liabilities totalling €467.0m more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company's €312.2m market capitalization, you might well be inclined to review the balance sheet, just like one might study a new partner's social media. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is A.S. Roma's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, A.S. Roma reported revenue of €256m, which is a gain of 26%. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though A.S. Roma managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping €80m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through €59m in negative free cash flow over the last year. That means it's on the risky side of things. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how A.S. Roma's profit, revenue, and operating cashflow have changed over the last few years.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.
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. Thank you for reading.
