Industria de Diseño Textil (BME:ITX) Could Easily Take On More 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. Importantly, Industria de Diseño Textil, S.A. (BME:ITX) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Industria de Diseño Textil

What Is Industria de Diseño Textil's Debt?

The image below, which you can click on for greater detail, shows that at January 2022 Industria de Diseño Textil had debt of €34.0m, up from €7.00m in one year. But it also has €9.40b in cash to offset that, meaning it has €9.36b net cash.

How Healthy Is Industria de Diseño Textil's Balance Sheet?

According to the last reported balance sheet, Industria de Diseño Textil had liabilities of €8.03b due within 12 months, and liabilities of €5.16b due beyond 12 months. On the other hand, it had cash of €9.40b and €1.06b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.73b.

Given Industria de Diseño Textil has a humongous market capitalization of €68.7b, it's hard to believe these liabilities pose much threat. 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, Industria de Diseño Textil also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Industria de Diseño Textil grew its EBIT by 156% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Industria de Diseño Textil's ability to maintain a healthy balance sheet going forward. 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. While Industria de Diseño Textil has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Industria de Diseño Textil 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.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Industria de Diseño Textil has €9.36b in net cash. And it impressed us with free cash flow of €5.6b, being 128% of its EBIT. So we don't think Industria de Diseño Textil's use of debt is risky. 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. Be aware that Industria de Diseño Textil is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.