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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Juventus Football Club S.p.A. (BIT:JUVE) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
What Is Juventus Football Club's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Juventus Football Club had €473.2m of debt, an increase on €329.2m, over one year. However, because it has a cash reserve of €21.2m, its net debt is less, at about €452.0m.
How Strong Is Juventus Football Club's Balance Sheet?
According to the last reported balance sheet, Juventus Football Club had liabilities of €390.6m due within 12 months, and liabilities of €520.0m due beyond 12 months. Offsetting these obligations, it had cash of €21.2m as well as receivables valued at €127.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €762.0m.
This deficit isn't so bad because Juventus Football Club is worth €1.32b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off 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 Juventus Football Club'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.
Over 12 months, Juventus Football Club reported revenue of €621m, which is a gain of 26%, 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.
While we can certainly savour Juventus Football Club's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. To be specific the EBIT loss came in at €15m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €102m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Juventus Football Club I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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