Does Compañía de Distribución Integral Logista Holdings (BME:LOG) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Compañía de Distribución Integral Logista Holdings, S.A. (BME:LOG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Compañía de Distribución Integral Logista Holdings

How Much Debt Does Compañía de Distribución Integral Logista Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Compañía de Distribución Integral Logista Holdings had €90.3m of debt, an increase on €46.7m, over one year. However, its balance sheet shows it holds €2.63b in cash, so it actually has €2.54b net cash.

A Look At Compañía de Distribución Integral Logista Holdings' Liabilities

We can see from the most recent balance sheet that Compañía de Distribución Integral Logista Holdings had liabilities of €7.22b falling due within a year, and liabilities of €519.5m due beyond that. Offsetting these obligations, it had cash of €2.63b as well as receivables valued at €2.18b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.94b.

This is a mountain of leverage relative to its market capitalization of €3.04b. 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!

Also good is that Compañía de Distribución Integral Logista Holdings grew its EBIT at 16% over the last year, further increasing its ability to manage 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 Compañía de Distribución Integral Logista Holdings'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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 €2.54b. And it impressed us with free cash flow of €211m, being 107% of its EBIT. So we are not troubled with Compañía de Distribución Integral Logista Holdings's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Compañía de Distribución Integral Logista Holdings .

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.