Here's Why Libertas 7 (BDM:LIB) Can Manage Its Debt Responsibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Libertas 7, S.A. (BDM:LIB) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Libertas 7

What Is Libertas 7's Debt?

You can click the graphic below for the historical numbers, but it shows that Libertas 7 had €40.1m of debt in December 2021, down from €44.2m, one year before. But it also has €53.9m in cash to offset that, meaning it has €13.7m net cash.

How Strong Is Libertas 7's Balance Sheet?

The latest balance sheet data shows that Libertas 7 had liabilities of €19.5m due within a year, and liabilities of €41.2m falling due after that. Offsetting these obligations, it had cash of €53.9m as well as receivables valued at €1.59m due within 12 months. So its liabilities total €5.22m more than the combination of its cash and short-term receivables.

Of course, Libertas 7 has a market capitalization of €32.7m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Libertas 7 also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Libertas 7 made a loss at the EBIT level, last year, but improved that to positive EBIT of €1.5m in the last twelve months. 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 Libertas 7 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Libertas 7 may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Libertas 7 actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Libertas 7's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €13.7m. The cherry on top was that in converted 196% of that EBIT to free cash flow, bringing in €3.0m. So we are not troubled with Libertas 7's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Libertas 7 (of which 1 doesn't sit too well with us!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.