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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 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 Net Debt?

As you can see below, Industria de Diseño Textil had €14.0m of debt at October 2023, down from €17.0m a year prior. But it also has €11.5b in cash to offset that, meaning it has €11.5b net cash.

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

The latest balance sheet data shows that Industria de Diseño Textil had liabilities of €11.8b due within a year, and liabilities of €4.92b falling due after that. Offsetting this, it had €11.5b in cash and €1.18b in receivables that were due within 12 months. So it has liabilities totalling €4.02b more than its cash and near-term receivables, combined.

Since publicly traded Industria de Diseño Textil shares are worth a very impressive total of €127.7b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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!

Another good sign is that Industria de Diseño Textil has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. 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 €11.5b in net cash. And it impressed us with free cash flow of €6.3b, being 108% of its EBIT. So is Industria de Diseño Textil's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Industria de Diseño Textil has 1 warning sign we think you should be aware of.

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.