Does Tubacex (BME:TUB) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Tubacex, S.A. (BME:TUB) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Tubacex

How Much Debt Does Tubacex Carry?

As you can see below, at the end of December 2020, Tubacex had €481.6m of debt, up from €433.9m a year ago. Click the image for more detail. On the flip side, it has €185.9m in cash leading to net debt of about €295.7m.

How Healthy Is Tubacex's Balance Sheet?

The latest balance sheet data shows that Tubacex had liabilities of €422.1m due within a year, and liabilities of €318.4m falling due after that. Offsetting these obligations, it had cash of €185.9m as well as receivables valued at €79.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €475.1m.

This deficit casts a shadow over the €238.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Tubacex would likely require a major re-capitalisation if it had to pay its creditors today. 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 Tubacex'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.

Over 12 months, Tubacex made a loss at the EBIT level, and saw its revenue drop to €482m, which is a fall of 22%. That makes us nervous, to say the least.

Caveat Emptor

While Tubacex's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €12m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through €32m in negative free cash flow over the last year. That means it's on the risky side of things. 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. To that end, you should learn about the 2 warning signs we've spotted with Tubacex (including 1 which is a bit concerning) .

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.

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