Is Iberpapel Gestión (BME:IBG) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Iberpapel Gestión, S.A. (BME:IBG) does carry debt. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Iberpapel Gestión

How Much Debt Does Iberpapel Gestión Carry?

As you can see below, Iberpapel Gestión had €91.7m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has €123.2m in cash, leading to a €31.4m net cash position.

How Healthy Is Iberpapel Gestión's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Iberpapel Gestión had liabilities of €52.1m due within 12 months and liabilities of €85.3m due beyond that. Offsetting these obligations, it had cash of €123.2m as well as receivables valued at €30.8m due within 12 months. So it actually has €16.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Iberpapel Gestión could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Iberpapel Gestión has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Iberpapel Gestión's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Iberpapel Gestión had a loss before interest and tax, and actually shrunk its revenue by 23%, to €154m. To be frank that doesn't bode well.

So How Risky Is Iberpapel Gestión?

Although Iberpapel Gestión had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of €3.3m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 Iberpapel Gestión you should be aware of.

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.

When trading Iberpapel Gestión or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.