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. 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?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

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

How Much Debt Does Compañía de Distribución Integral Logista Holdings Carry?

As you can see below, Compañía de Distribución Integral Logista Holdings had €13.6m of debt at March 2023, down from €20.2m a year prior. But on the other hand it also has €172.8m in cash, leading to a €159.2m net cash position.

How Strong 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 €6.57b due within a year, and liabilities of €518.3m falling due after that. Offsetting these obligations, it had cash of €172.8m as well as receivables valued at €3.95b due within 12 months. So it has liabilities totalling €2.97b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €3.30b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Compañía de Distribución Integral Logista Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Compañía de Distribución Integral Logista Holdings grew its EBIT at 11% over the last year, further increasing its ability to manage debt. 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 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. 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 €159.2m. The cherry on top was that in converted 150% of that EBIT to free cash flow, bringing in €211m. 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. Case in point: We've spotted 1 warning sign for Compañía de Distribución Integral Logista Holdings 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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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.