Here's Why Compañía de Distribución Integral Logista Holdings (BME:LOG) Can Manage Its Debt Responsibly

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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Compañía de Distribución Integral Logista Holdings

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

As you can see below, at the end of September 2020, Compañía de Distribución Integral Logista Holdings had €71.5m of debt, up from €63.6m a year ago. Click the image for more detail. However, it does have €162.8m in cash offsetting this, leading to net cash of €91.3m.

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

The latest balance sheet data shows that Compañía de Distribución Integral Logista Holdings had liabilities of €6.91b due within a year, and liabilities of €421.2m falling due after that. Offsetting these obligations, it had cash of €162.8m as well as receivables valued at €4.64b due within 12 months. So its liabilities total €2.52b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's €2.03b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Compañía de Distribución Integral Logista Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

But the other side of the story is that Compañía de Distribución Integral Logista Holdings saw its EBIT decline by 2.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Happily for any shareholders, Compañía de Distribución Integral Logista Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 €91.3m. The cherry on top was that in converted 236% of that EBIT to free cash flow, bringing in €792m. 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. Take risks, for example - Compañía de Distribución Integral Logista Holdings has 1 warning sign we think 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.

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