We Think Libertas 7 (BDM:LIB) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Libertas 7

What Is Libertas 7's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Libertas 7 had €39.1m of debt in June 2021, down from €43.0m, one year before. But it also has €60.7m in cash to offset that, meaning it has €21.6m net cash.

How Strong Is Libertas 7's Balance Sheet?

The latest balance sheet data shows that Libertas 7 had liabilities of €17.0m due within a year, and liabilities of €41.6m falling due after that. On the other hand, it had cash of €60.7m and €1.33m worth of receivables due within a year. So it actually has €3.37m more liquid assets than total liabilities.

This surplus suggests that Libertas 7 has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Libertas 7 has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that Libertas 7 improved its EBIT from a last year's loss to a positive €656k. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last year, Libertas 7 actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Libertas 7 has €21.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 1,598% of that EBIT to free cash flow, bringing in €10m. So we don't have any problem with Libertas 7's use of debt. 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. Be aware that Libertas 7 is showing 2 warning signs in our investment analysis , you should know about...

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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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.
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