Is Compañía de Distribución Integral Logista Holdings (BME:LOG) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Compañía de Distribución Integral Logista Holdings, S.A. (BME:LOG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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.

View our latest analysis for Compañía de Distribución Integral Logista Holdings

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

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Compañía de Distribución Integral Logista Holdings had €76.9m of debt, an increase on €65.0m, over one year. However, it does have €2.29b in cash offsetting this, leading to net cash of €2.21b.

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 €6.79b due within a year, and liabilities of €388.5m falling due after that. Offsetting this, it had €2.29b in cash and €2.09b in receivables that were due within 12 months. So it has liabilities totalling €2.80b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of €2.40b, 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.

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. The balance sheet is clearly the area to focus on when you are analysing debt. 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. During the last three years, Compañía de Distribución Integral Logista Holdings generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While Compañía de Distribución Integral Logista Holdings does have more liabilities than liquid assets, it also has net cash of €2.21b. And it impressed us with free cash flow of €551m, being 84% of its EBIT. So we are not troubled with Compañía de Distribución Integral Logista Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Compañía de Distribución Integral Logista Holdings that you should be aware of before investing here.

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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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.
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