These 4 Measures Indicate That Inmofam 99 SOCIMI (BME:YINM) Is Using Debt Safely

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.' 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. We note that Inmofam 99 SOCIMI, S.A. (BME:YINM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Inmofam 99 SOCIMI

What Is Inmofam 99 SOCIMI's Net Debt?

As you can see below, Inmofam 99 SOCIMI had €3.90m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, it also had €3.61m in cash, and so its net debt is €291.7k.

A Look At Inmofam 99 SOCIMI's Liabilities

We can see from the most recent balance sheet that Inmofam 99 SOCIMI had liabilities of €4.28m falling due within a year, and liabilities of €15.0k due beyond that. Offsetting these obligations, it had cash of €3.61m as well as receivables valued at €61.8k due within 12 months. So it has liabilities totalling €626.6k more than its cash and near-term receivables, combined.

Having regard to Inmofam 99 SOCIMI's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €37.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Inmofam 99 SOCIMI has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Inmofam 99 SOCIMI's net debt is only 0.16 times its EBITDA. And its EBIT easily covers its interest expense, being 21.1 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Fortunately, Inmofam 99 SOCIMI grew its EBIT by 3.3% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Inmofam 99 SOCIMI will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Happily for any shareholders, Inmofam 99 SOCIMI actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Happily, Inmofam 99 SOCIMI's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Zooming out, Inmofam 99 SOCIMI seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Inmofam 99 SOCIMI (of which 1 is a bit concerning!) 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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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.