These 4 Measures Indicate That Invibes Advertising (EPA:ALINV) 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.' 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 can see that Invibes Advertising N.V. (EPA:ALINV) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Invibes Advertising

What Is Invibes Advertising's Net Debt?

As you can see below, at the end of June 2020, Invibes Advertising had €2.99m of debt, up from €1.76m a year ago. Click the image for more detail. But on the other hand it also has €4.67m in cash, leading to a €1.68m net cash position.

How Strong Is Invibes Advertising's Balance Sheet?

The latest balance sheet data shows that Invibes Advertising had liabilities of €4.69m due within a year, and liabilities of €1.09m falling due after that. Offsetting these obligations, it had cash of €4.67m as well as receivables valued at €3.63m due within 12 months. So it actually has €2.52m more liquid assets than total liabilities.

This short term liquidity is a sign that Invibes Advertising could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Invibes Advertising has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Invibes Advertising turned things around in the last 12 months, delivering and EBIT of €679k. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Invibes Advertising'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. Invibes Advertising 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 year, Invibes Advertising saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Invibes Advertising has net cash of €1.68m, as well as more liquid assets than liabilities. So we are not troubled with Invibes Advertising'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. To that end, you should learn about the 4 warning signs we've spotted with Invibes Advertising (including 2 which is shouldn't be ignored) .

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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