We Think Bilendi (EPA:ALBLD) Can Stay On Top Of Its Debt

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.' 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, Bilendi SA (EPA:ALBLD) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Bilendi

What Is Bilendi's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Bilendi had €4.74m of debt, an increase on €2.19m, over one year. However, it does have €10.3m in cash offsetting this, leading to net cash of €5.53m.

How Strong Is Bilendi's Balance Sheet?

We can see from the most recent balance sheet that Bilendi had liabilities of €12.9m falling due within a year, and liabilities of €8.17m due beyond that. Offsetting this, it had €10.3m in cash and €12.1m in receivables that were due within 12 months. So it can boast €1.20m more liquid assets than total liabilities.

This surplus suggests that Bilendi has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Bilendi has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Bilendi's EBIT dived 16%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bilendi can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Bilendi 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. In the last three years, Bilendi's free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Bilendi has net cash of €5.53m, as well as more liquid assets than liabilities. So we are not troubled with Bilendi'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. Be aware that Bilendi is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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