These 4 Measures Indicate That Grupo Empresarial San José (BME:GSJ) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Grupo Empresarial San José, S.A. (BME:GSJ) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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.

Check out our latest analysis for Grupo Empresarial San José

What Is Grupo Empresarial San José's Debt?

You can click the graphic below for the historical numbers, but it shows that Grupo Empresarial San José had €154.8m of debt in March 2021, down from €177.7m, one year before. However, its balance sheet shows it holds €356.2m in cash, so it actually has €201.5m net cash.

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

According to the last reported balance sheet, Grupo Empresarial San José had liabilities of €618.9m due within 12 months, and liabilities of €180.5m due beyond 12 months. Offsetting this, it had €356.2m in cash and €341.4m in receivables that were due within 12 months. So its liabilities total €101.8m more than the combination of its cash and short-term receivables.

Grupo Empresarial San José has a market capitalization of €377.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Grupo Empresarial San José also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Grupo Empresarial San José grew its EBIT by 255% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Grupo Empresarial San José'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Grupo Empresarial San José actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Grupo Empresarial San José does have more liabilities than liquid assets, it also has net cash of €201.5m. The cherry on top was that in converted 288% of that EBIT to free cash flow, bringing in €72m. So is Grupo Empresarial San José's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 4 warning signs for Grupo Empresarial San José that you should be aware of before investing here.

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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