Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Minerales y Productos Derivados, S.A. (BDM:MYD) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Minerales y Productos Derivados's Debt?
The chart below, which you can click on for greater detail, shows that Minerales y Productos Derivados had €254.4m in debt in June 2020; about the same as the year before. But it also has €277.2m in cash to offset that, meaning it has €22.8m net cash.
How Strong Is Minerales y Productos Derivados's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Minerales y Productos Derivados had liabilities of €86.0m due within 12 months and liabilities of €273.0m due beyond that. On the other hand, it had cash of €277.2m and €65.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €16.5m.
This deficit casts a shadow over the €5.36m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Minerales y Productos Derivados would probably need a major re-capitalization if its creditors were to demand repayment. Given that Minerales y Productos Derivados has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.
While Minerales y Productos Derivados doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Minerales y Productos Derivados will need earnings to service that debt. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Minerales y Productos Derivados has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Minerales y Productos Derivados recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While Minerales y Productos Derivados does have more liabilities than liquid assets, it also has net cash of €22.8m. And it impressed us with free cash flow of €28m, being 67% of its EBIT. So although we see some areas for improvement, we're not too worried about Minerales y Productos Derivados's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Minerales y Productos Derivados you should be aware of, and 1 of them doesn't sit too well with us.
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.
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Minerales y Productos Derivados
Minerales y Productos Derivados, S.A. produces and sells minerals and chemical products in Spain.
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Good value with adequate balance sheet.