We Think Compañía de Distribución Integral Logista Holdings (BME:LOG) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Compañía de Distribución Integral Logista Holdings, S.A. (BME:LOG) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Compañía de Distribución Integral Logista Holdings

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

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Compañía de Distribución Integral Logista Holdings had €68.0m of debt, an increase on €49.9m, over one year. However, its balance sheet shows it holds €1.63b in cash, so it actually has €1.56b net cash.

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

We can see from the most recent balance sheet that Compañía de Distribución Integral Logista Holdings had liabilities of €6.12b falling due within a year, and liabilities of €518.2m due beyond that. Offsetting these obligations, it had cash of €1.63b as well as receivables valued at €2.07b due within 12 months. So its liabilities total €2.94b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €3.06b, so it does suggest shareholders should keep an eye on Compañía de Distribución Integral Logista Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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!

Fortunately, Compañía de Distribución Integral Logista Holdings grew its EBIT by 6.8% in the last year, making that debt load look even more manageable. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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 €1.56b. The cherry on top was that in converted 184% of that EBIT to free cash flow, bringing in €607m. So we don't have any problem with Compañía de Distribución Integral Logista Holdings's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Compañía de Distribución Integral Logista Holdings , and understanding them should be part of your investment process.

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.