Is Logista Integral (BME:LOG) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Logista Integral, S.A. (BME:LOG) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Logista Integral

How Much Debt Does Logista Integral Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Logista Integral had €108.0m of debt, an increase on €90.3m, over one year. But on the other hand it also has €2.16b in cash, leading to a €2.05b net cash position.

How Healthy Is Logista Integral's Balance Sheet?

According to the last reported balance sheet, Logista Integral had liabilities of €6.85b due within 12 months, and liabilities of €542.0m due beyond 12 months. Offsetting these obligations, it had cash of €2.16b as well as receivables valued at €2.15b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.07b.

This deficit is considerable relative to its market capitalization of €3.58b, so it does suggest shareholders should keep an eye on Logista Integral's use of debt. 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, Logista Integral also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Logista Integral has increased its EBIT by 6.9% 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 it is future earnings, more than anything, that will determine Logista Integral'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 company can only pay off debt with cold hard cash, not accounting profits. Logista Integral 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, Logista Integral recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While Logista Integral does have more liabilities than liquid assets, it also has net cash of €2.05b. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in €42m. So we don't have any problem with Logista Integral'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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Logista Integral (of which 1 can't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.