Does J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing (ATH:MIN) Have A 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.' 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, J. & B. Ladenis Bros S.A. - Minerva - Knitwear Manufacturing Company (ATH:MIN) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing

What Is J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing's Net Debt?

The chart below, which you can click on for greater detail, shows that J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing had €15.3m in debt in June 2021; about the same as the year before. On the flip side, it has €386.0k in cash leading to net debt of about €14.9m.

How Healthy Is J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing's Balance Sheet?

The latest balance sheet data shows that J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing had liabilities of €6.35m due within a year, and liabilities of €16.7m falling due after that. Offsetting this, it had €386.0k in cash and €4.67m in receivables that were due within 12 months. So its liabilities total €18.0m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €3.78m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing would probably need a major re-capitalization if its creditors were to demand repayment.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing shareholders face the double whammy of a high net debt to EBITDA ratio (8.2), and fairly weak interest coverage, since EBIT is just 2.1 times the interest expense. This means we'd consider it to have a heavy debt load. However, it should be some comfort for shareholders to recall that J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing actually grew its EBIT by a hefty 126%, over the last 12 months. If it can keep walking that path it will be in a position to shed its debt with relative ease. The balance sheet is clearly the area to focus on when you are analysing debt. But it is J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing reported free cash flow worth 11% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

To be frank both J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing's net debt to EBITDA and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. We're quite clear that we consider J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. 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. For instance, we've identified 2 warning signs for J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing that you should be aware of.

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.