Is Industria de Diseño Textil (BME:ITX) A Risky Investment?

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.' 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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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.

Check out our latest analysis for Industria de Diseño Textil

What Is Industria de Diseño Textil's Debt?

As you can see below, Industria de Diseño Textil had €11.0m of debt at July 2023, down from €54.5m a year prior. But it also has €10.6b in cash to offset that, meaning it has €10.5b net cash.

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 €10.7b due within 12 months and liabilities of €4.84b due beyond that. Offsetting these obligations, it had cash of €10.6b as well as receivables valued at €1.15b due within 12 months. So its liabilities total €3.82b more than the combination of its cash and short-term receivables.

Since publicly traded Industria de Diseño Textil shares are worth a very impressive total of €111.0b, it seems unlikely that this level of liabilities would be a major 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.

Another good sign is that Industria de Diseño Textil has been able to increase its EBIT by 26% in twelve months, making it easier to pay down 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'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. 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Industria de Diseño Textil has €10.5b in net cash. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in €6.3b. 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. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.