Industria de Diseño Textil (BME:ITX) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Industria de Diseño Textil, S.A. (BME:ITX) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Industria de Diseño Textil

How Much Debt Does Industria de Diseño Textil Carry?

As you can see below, at the end of October 2022, Industria de Diseño Textil had €17.0m of debt, up from €5.00m a year ago. Click the image for more detail. However, its balance sheet shows it holds €10.00b in cash, so it actually has €9.98b net cash.

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

Zooming in on the latest balance sheet data, we can see that Industria de Diseño Textil had liabilities of €10.9b due within 12 months and liabilities of €4.99b due beyond that. Offsetting this, it had €10.00b in cash and €978.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.88b.

Of course, Industria de Diseño Textil has a titanic market capitalization of €77.7b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

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 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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 €9.98b. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in €5.3b. So we don't think Industria de Diseño Textil's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Industria de Diseño Textil that you should be aware of before investing here.

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.