Itesoft (EPA:ITE) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Itesoft S.A. (EPA:ITE) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Itesoft

How Much Debt Does Itesoft Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Itesoft had €7.83m of debt, an increase on €4.15m, over one year. However, its balance sheet shows it holds €13.3m in cash, so it actually has €5.46m net cash.

How Strong Is Itesoft's Balance Sheet?

We can see from the most recent balance sheet that Itesoft had liabilities of €16.8m falling due within a year, and liabilities of €11.5m due beyond that. Offsetting this, it had €13.3m in cash and €10.2m in receivables that were due within 12 months. So it has liabilities totalling €4.84m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Itesoft is worth €23.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Itesoft also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Itesoft's EBIT was down 55% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Itesoft 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Itesoft 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, Itesoft actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Itesoft does have more liabilities than liquid assets, it also has net cash of €5.46m. The cherry on top was that in converted 323% of that EBIT to free cash flow, bringing in €4.9m. So we don't have any problem with Itesoft'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. Be aware that Itesoft is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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