Is Liwe Española (BDM:LIW) Using Debt Sensibly?

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. Importantly, Liwe Española, S.A. (BDM:LIW) does carry debt. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Liwe Española

What Is Liwe Española's Debt?

The chart below, which you can click on for greater detail, shows that Liwe Española had €61.7m in debt in June 2021; about the same as the year before. However, because it has a cash reserve of €6.55m, its net debt is less, at about €55.1m.

A Look At Liwe Española's Liabilities

According to the last reported balance sheet, Liwe Española had liabilities of €58.6m due within 12 months, and liabilities of €97.0m due beyond 12 months. Offsetting these obligations, it had cash of €6.55m as well as receivables valued at €1.77m due within 12 months. So it has liabilities totalling €147.2m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €8.33m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Liwe Española would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Liwe Española'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.

In the last year Liwe Española had a loss before interest and tax, and actually shrunk its revenue by 2.9%, to €115m. That's not what we would hope to see.

Caveat Emptor

Importantly, Liwe Española had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €1.2m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost €14m in the last year. So we think buying this stock is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Liwe Española (of which 2 make us uncomfortable!) you should know about.

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.

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.

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