Is Distribuidora Internacional de Alimentación (BME:DIA) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Distribuidora Internacional de Alimentación, S.A. (BME:DIA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Distribuidora Internacional de Alimentación

How Much Debt Does Distribuidora Internacional de Alimentación Carry?

As you can see below, Distribuidora Internacional de Alimentación had €764.3m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has €221.6m in cash leading to net debt of about €542.7m.

How Strong Is Distribuidora Internacional de Alimentación's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Distribuidora Internacional de Alimentación had liabilities of €1.97b due within 12 months and liabilities of €1.14b due beyond that. Offsetting this, it had €221.6m in cash and €259.2m in receivables that were due within 12 months. So it has liabilities totalling €2.63b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €847.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Distribuidora Internacional de Alimentación would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Distribuidora Internacional de Alimentación can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Distribuidora Internacional de Alimentación wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to €6.5b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Distribuidora Internacional de Alimentación had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €18m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of €126m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Distribuidora Internacional de Alimentación that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.