Industria de Diseño Textil (BME:ITX) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Industria de Diseño Textil, S.A. (BME:ITX) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Industria de Diseño Textil

How Much Debt Does Industria de Diseño Textil Carry?

You can click the graphic below for the historical numbers, but it shows that Industria de Diseño Textil had €12.0m of debt in January 2023, down from €33.0m, one year before. But on the other hand it also has €10.1b in cash, leading to a €10.1b net cash position.

A Look At Industria de Diseño Textil's Liabilities

The latest balance sheet data shows that Industria de Diseño Textil had liabilities of €8.14b due within a year, and liabilities of €4.81b falling due after that. On the other hand, it had cash of €10.1b and €1.09b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.78b.

This state of affairs indicates that Industria de Diseño Textil's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €94.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Industria de Diseño Textil boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Industria de Diseño Textil has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Industria de Diseño Textil's liabilities, but we can be reassured by the fact it has has net cash of €10.1b. And it impressed us with free cash flow of €5.3b, being 115% of its EBIT. So is Industria de Diseño Textil's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Industria de Diseño Textil you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.