Does Miquel y Costas & Miquel (BME:MCM) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Miquel y Costas & Miquel, S.A. (BME:MCM) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Miquel y Costas & Miquel

What Is Miquel y Costas & Miquel's Net Debt?

As you can see below, Miquel y Costas & Miquel had €67.7m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have €78.6m in cash offsetting this, leading to net cash of €10.9m.

How Strong Is Miquel y Costas & Miquel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Miquel y Costas & Miquel had liabilities of €67.8m due within 12 months and liabilities of €55.5m due beyond that. Offsetting these obligations, it had cash of €78.6m as well as receivables valued at €41.9m due within 12 months. So it has liabilities totalling €2.76m more than its cash and near-term receivables, combined.

Having regard to Miquel y Costas & Miquel's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €431.3m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Miquel y Costas & Miquel also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Miquel y Costas & Miquel grew its EBIT by 9.2% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Miquel y Costas & Miquel's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Miquel y Costas & Miquel 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. During the last three years, Miquel y Costas & Miquel produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Miquel y Costas & Miquel has €10.9m in net cash. And it also grew its EBIT by 9.2% over the last year. So is Miquel y Costas & Miquel's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Miquel y Costas & Miquel, you may well want to click here to check an interactive graph of its earnings per share history.

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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