Is Libertas 7 (BDM:LIB) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Libertas 7, S.A. (BDM:LIB) makes use of debt. 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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Libertas 7

How Much Debt Does Libertas 7 Carry?

As you can see below, Libertas 7 had €42.1m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds €45.0m in cash, so it actually has €2.95m net cash.

How Strong Is Libertas 7's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Libertas 7 had liabilities of €23.5m due within 12 months and liabilities of €41.7m due beyond that. On the other hand, it had cash of €45.0m and €1.12m worth of receivables due within a year. So it has liabilities totalling €19.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Libertas 7 is worth €80.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Libertas 7 boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Libertas 7's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Libertas 7 made a loss at the EBIT level, and saw its revenue drop to €3.8m, which is a fall of 32%. That makes us nervous, to say the least.

So How Risky Is Libertas 7?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Libertas 7 had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €2.5m and booked a €3.6m accounting loss. With only €2.95m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Libertas 7 has 4 warning signs (and 1 which doesn't sit too well with us) we think 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. 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.
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