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. We note that Industria de Diseño Textil, S.A. (BME:ITX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, 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 July 2024, Industria de Diseño Textil had €17.0m of debt, up from €11.0m a year ago. Click the image for more detail. However, it does have €10.9b in cash offsetting this, leading to net cash of €10.9b.

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

According to the last reported balance sheet, Industria de Diseño Textil had liabilities of €11.9b due within 12 months, and liabilities of €4.80b due beyond 12 months. On the other hand, it had cash of €10.9b and €1.62b worth of receivables due within a year. So it has liabilities totalling €4.16b more than its cash and near-term receivables, combined.

Of course, Industria de Diseño Textil has a titanic market capitalization of €160.8b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 15% 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 recorded free cash flow worth a fulsome 97% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

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 €10.9b in net cash. The cherry on top was that in converted 97% 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. 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 instance, we've identified 1 warning sign for Industria de Diseño Textil that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.