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. 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 the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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. 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.
How Much Debt Does Minerales y Productos Derivados Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Minerales y Productos Derivados had €245.2m of debt, an increase on €227.9m, over one year. But on the other hand it also has €285.9m in cash, leading to a €40.7m net cash position.
How Healthy Is Minerales y Productos Derivados's Balance Sheet?
We can see from the most recent balance sheet that Minerales y Productos Derivados had liabilities of €97.9m falling due within a year, and liabilities of €272.7m due beyond that. Offsetting these obligations, it had cash of €285.9m as well as receivables valued at €75.3m due within 12 months. So it has liabilities totalling €9.37m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the €5.36m 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, Minerales y Productos Derivados would likely require a major re-capitalisation if it had to pay its creditors today. Minerales y Productos Derivados boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
On top of that, Minerales y Productos Derivados grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Minerales y Productos Derivados'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Minerales y Productos Derivados 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 most recent three years, Minerales y Productos Derivados recorded free cash flow worth 71% 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.
Although Minerales y Productos Derivados's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €40.7m. And we liked the look of last year's 34% year-on-year EBIT growth. So we don't have any problem with Minerales y Productos Derivados's use of debt. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Minerales y Productos Derivados (of which 1 shouldn't be ignored!) you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
Valuation is complex, but we're helping make it simple.
Find out whether Minerales y Productos Derivados is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis