Iberpapel Gestión (BME:IBG) Has A Somewhat Strained Balance Sheet

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 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. We can see that Iberpapel Gestión, S.A. (BME:IBG) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Iberpapel Gestión

What Is Iberpapel Gestión's Debt?

As you can see below, at the end of September 2020, Iberpapel Gestión had €95.9m of debt, up from €73.3m a year ago. Click the image for more detail. But it also has €144.0m in cash to offset that, meaning it has €48.1m net cash.

How Strong Is Iberpapel Gestión's Balance Sheet?

The latest balance sheet data shows that Iberpapel Gestión had liabilities of €34.8m due within a year, and liabilities of €90.0m falling due after that. On the other hand, it had cash of €144.0m and €22.2m worth of receivables due within a year. So it can boast €41.4m more liquid assets than total liabilities.

It's good to see that Iberpapel Gestión has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Iberpapel Gestión has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Iberpapel Gestión's EBIT fell a jaw-dropping 94% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Iberpapel Gestión 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Iberpapel Gestión 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 last three years, Iberpapel Gestión reported free cash flow worth 13% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Iberpapel Gestión has €48.1m in net cash and a decent-looking balance sheet. So while Iberpapel Gestión does not have a great balance sheet, it's certainly not too bad. 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. Case in point: We've spotted 2 warning signs for Iberpapel Gestión you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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