Here's Why Grupo Empresarial San José (BME:GSJ) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Grupo Empresarial San José, S.A. (BME:GSJ) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Grupo Empresarial San José

What Is Grupo Empresarial San José's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Grupo Empresarial San José had €117.4m of debt in September 2021, down from €154.3m, one year before. However, its balance sheet shows it holds €322.5m in cash, so it actually has €205.1m net cash.

How Healthy Is Grupo Empresarial San José's Balance Sheet?

The latest balance sheet data shows that Grupo Empresarial San José had liabilities of €613.6m due within a year, and liabilities of €161.8m falling due after that. Offsetting these obligations, it had cash of €322.5m as well as receivables valued at €345.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €107.0m.

This deficit isn't so bad because Grupo Empresarial San José is worth €294.6m, 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. Despite its noteworthy liabilities, Grupo Empresarial San José boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Grupo Empresarial San José turned things around in the last 12 months, delivering and EBIT of €23m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Grupo Empresarial San José'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Grupo Empresarial San José may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Grupo Empresarial San José actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Grupo Empresarial San José's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €205.1m. And it impressed us with free cash flow of €87m, being 375% of its EBIT. So we don't have any problem with Grupo Empresarial San José's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Grupo Empresarial San José you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.