Compañía de Distribución Integral Logista Holdings (BME:LOG) Seems To Use Debt Quite Sensibly

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.' 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 can see that Compañía de Distribución Integral Logista Holdings, S.A. (BME:LOG) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Compañía de Distribución Integral Logista Holdings

What Is Compañía de Distribución Integral Logista Holdings's Debt?

As you can see below, Compañía de Distribución Integral Logista Holdings had €36.9m of debt at September 2022, down from €69.8m a year prior. However, it does have €218.7m in cash offsetting this, leading to net cash of €181.9m.

How Strong Is Compañía de Distribución Integral Logista Holdings' Balance Sheet?

We can see from the most recent balance sheet that Compañía de Distribución Integral Logista Holdings had liabilities of €6.76b falling due within a year, and liabilities of €364.5m due beyond that. On the other hand, it had cash of €218.7m and €4.34b worth of receivables due within a year. So it has liabilities totalling €2.57b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €3.16b, so it does suggest shareholders should keep an eye on Compañía de Distribución Integral Logista Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Compañía de Distribución Integral Logista Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Compañía de Distribución Integral Logista Holdings has increased its EBIT by 5.8% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Compañía de Distribución Integral Logista Holdings 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Compañía de Distribución Integral Logista Holdings 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. Over the last three years, Compañía de Distribución Integral Logista Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Compañía de Distribución Integral Logista Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €181.9m. And it impressed us with free cash flow of €607m, being 154% of its EBIT. So we don't have any problem with Compañía de Distribución Integral Logista Holdings's use of debt. 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. We've identified 1 warning sign with Compañía de Distribución Integral Logista Holdings , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.