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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Compañía de Distribución Integral Logista Holdings, S.A. (BME:LOG) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

The image below, which you can click on for greater detail, shows that Compañía de Distribución Integral Logista Holdings had debt of €20.2m at the end of March 2022, a reduction from €46.1m over a year. But it also has €155.8m in cash to offset that, meaning it has €135.6m net cash.

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

Zooming in on the latest balance sheet data, we can see that Compañía de Distribución Integral Logista Holdings had liabilities of €6.25b due within 12 months and liabilities of €369.1m due beyond that. Offsetting these obligations, it had cash of €155.8m as well as receivables valued at €3.94b due within 12 months. So its liabilities total €2.52b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of €2.47b, 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.

The good news is that Compañía de Distribución Integral Logista Holdings has increased its EBIT by 8.8% 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'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. Compañía de Distribución Integral Logista Holdings 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, 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

While Compañía de Distribución Integral Logista Holdings does have more liabilities than liquid assets, it also has net cash of €135.6m. The cherry on top was that in converted 142% of that EBIT to free cash flow, bringing in €358m. So we are not troubled with Compañía de Distribución Integral Logista Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Compañía de Distribución Integral Logista Holdings that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.