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

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.' 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 note that Industria de Diseño Textil, S.A. (BME:ITX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Industria de Diseño Textil

What Is Industria de Diseño Textil's Net Debt?

The image below, which you can click on for greater detail, shows that Industria de Diseño Textil had debt of €14.0m at the end of April 2023, a reduction from €23.0m over a year. But on the other hand it also has €10.5b in cash, leading to a €10.5b net cash position.

A Look At Industria de Diseño Textil's Liabilities

Zooming in on the latest balance sheet data, we can see that Industria de Diseño Textil had liabilities of €10.3b due within 12 months and liabilities of €4.86b due beyond that. On the other hand, it had cash of €10.5b and €1.02b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.65b.

Since publicly traded Industria de Diseño Textil shares are worth a very impressive total of €106.5b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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!

Also good is that Industria de Diseño Textil grew its EBIT at 17% over the last year, further increasing its ability to manage debt. 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 Industria de Diseño Textil 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, a company can only pay off debt with cold hard cash, not accounting profits. Industria de Diseño Textil 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 three years, Industria de Diseño Textil actually produced more free cash flow than EBIT. 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 €10.5b. And it impressed us with free cash flow of €5.3b, being 105% 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Industria de Diseño Textil 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.