Is Logic Instrument (EPA:ALLOG) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Logic Instrument S.A. (EPA:ALLOG) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Logic Instrument's Net Debt?

As you can see below, Logic Instrument had €3.77m of debt at December 2024, down from €4.92m a year prior. However, it does have €5.37m in cash offsetting this, leading to net cash of €1.60m.

How Strong Is Logic Instrument's Balance Sheet?

According to the balance sheet data, Logic Instrument had liabilities of €8.58m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of €5.37m as well as receivables valued at €4.73m due within 12 months. So it can boast €1.53m more liquid assets than total liabilities.

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

Check out our latest analysis for Logic Instrument

Even more impressive was the fact that Logic Instrument grew its EBIT by 134% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Logic Instrument can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Logic Instrument 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 most recent two years, Logic Instrument recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Logic Instrument has €1.60m in net cash and a decent-looking balance sheet. And we liked the look of last year's 134% year-on-year EBIT growth. So we don't think Logic Instrument's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Logic Instrument (at least 1 which is concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.