David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Distribuidora Internacional de Alimentación, S.A. (BME:DIA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Distribuidora Internacional de Alimentación Carry?
As you can see below, Distribuidora Internacional de Alimentación had €747.2m of debt at December 2021, down from €1.60b a year prior. On the flip side, it has €363.0m in cash leading to net debt of about €384.2m.
How Healthy Is Distribuidora Internacional de Alimentación's Balance Sheet?
We can see from the most recent balance sheet that Distribuidora Internacional de Alimentación had liabilities of €1.82b falling due within a year, and liabilities of €1.15b due beyond that. On the other hand, it had cash of €363.0m and €229.1m worth of receivables due within a year. So its liabilities total €2.39b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the €696.4m 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 definitely think shareholders need to watch this one closely. At the end of the day, Distribuidora Internacional de Alimentación would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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.
Over 12 months, Distribuidora Internacional de Alimentación made a loss at the EBIT level, and saw its revenue drop to €6.7b, which is a fall of 3.3%. That's not what we would hope to see.
Importantly, Distribuidora Internacional de Alimentación had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €55m 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. Nevertheless, we would not bet on it given that it lost €257m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Distribuidora Internacional de Alimentación (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.
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.
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.