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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View 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 March 2021, Compañía de Distribución Integral Logista Holdings had €46.1m of debt, up from €40.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds €165.4m in cash, so it actually has €119.4m net cash.

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

The latest balance sheet data shows that Compañía de Distribución Integral Logista Holdings had liabilities of €6.31b due within a year, and liabilities of €406.0m falling due after that. Offsetting this, it had €165.4m in cash and €3.97b in receivables that were due within 12 months. So it has liabilities totalling €2.58b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of €2.42b, we think shareholders really should watch Compañía de Distribución Integral Logista Holdings's debt levels, like a parent watching their child ride a bike for the first time. 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.

And we also note warmly that Compañía de Distribución Integral Logista Holdings grew its EBIT by 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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, 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 most recent three years, Compañía de Distribución Integral Logista Holdings recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 €119.4m. And it impressed us with free cash flow of €551m, being 71% of its EBIT. So we don't have any problem with Compañía de Distribución Integral Logista Holdings's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Compañía de Distribución Integral Logista Holdings has 1 warning sign we think you should be aware of.

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. 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.
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