These 4 Measures Indicate That Logista Integral (BME:LOG) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Logista Integral, S.A. (BME:LOG) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Logista Integral

How Much Debt Does Logista Integral Carry?

As you can see below, at the end of December 2023, Logista Integral had €96.0m of debt, up from €68.0m a year ago. Click the image for more detail. However, it does have €1.64b in cash offsetting this, leading to net cash of €1.55b.

How Strong Is Logista Integral's Balance Sheet?

The latest balance sheet data shows that Logista Integral had liabilities of €6.38b due within a year, and liabilities of €486.0m falling due after that. Offsetting this, it had €1.64b in cash and €2.09b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.14b.

This is a mountain of leverage relative to its market capitalization of €3.29b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Logista Integral boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Logista Integral grew its EBIT at 14% over the last year, further increasing its ability to manage debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Logista Integral 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, Logista Integral generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd 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 €1.55b. And it impressed us with free cash flow of €263m, being 86% of its EBIT. So we are not troubled with Logista Integral's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Logista Integral , and understanding them should be part of your investment process.

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.