These 4 Measures Indicate That Industria de Diseño Textil (BME:ITX) Is Using Debt Safely

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. As with many other companies Industria de Diseño Textil, S.A. (BME:ITX) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Debt?

As you can see below, at the end of January 2024, Industria de Diseño Textil had €15.0m of debt, up from €12.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds €11.4b in cash, so it actually has €11.4b net cash.

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

According to the last reported balance sheet, Industria de Diseño Textil had liabilities of €8.94b due within 12 months, and liabilities of €5.13b due beyond 12 months. Offsetting these obligations, it had cash of €11.4b as well as receivables valued at €1.52b due within 12 months. So it has liabilities totalling €1.12b more than its cash and near-term receivables, combined.

Having regard to Industria de Diseño Textil's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €135.6b 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!

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. When analysing debt levels, the balance sheet is the obvious place to start. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 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 €11.4b in net cash. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in €6.8b. 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.

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.