Is Tubacex (BME:TUB) Using Debt In A Risky Way?

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 Tubacex, S.A. (BME:TUB) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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.

See our latest analysis for Tubacex

How Much Debt Does Tubacex Carry?

You can click the graphic below for the historical numbers, but it shows that Tubacex had €451.2m of debt in June 2020, down from €472.7m, one year before. However, it does have €171.8m in cash offsetting this, leading to net debt of about €279.4m.

A Look At Tubacex's Liabilities

According to the last reported balance sheet, Tubacex had liabilities of €430.1m due within 12 months, and liabilities of €291.1m due beyond 12 months. Offsetting this, it had €171.8m in cash and €99.8m in receivables that were due within 12 months. So its liabilities total €449.4m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €186.2m 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 €577m, which is a fall of 2.2%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Tubacex produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €8.2m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of €43m over the last twelve months. That means it's on the risky side of things. 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. Take risks, for example - Tubacex has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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