Inapa - Investimentos Participações e Gestão (ELI:INA) Has A Somewhat Strained Balance Sheet

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.' 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. We note that Inapa - Investimentos, Participações e Gestão, S.A. (ELI:INA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Inapa - Investimentos Participações e Gestão

How Much Debt Does Inapa - Investimentos Participações e Gestão Carry?

You can click the graphic below for the historical numbers, but it shows that Inapa - Investimentos Participações e Gestão had €190.0m of debt in June 2023, down from €207.0m, one year before. However, it also had €9.52m in cash, and so its net debt is €180.5m.

A Look At Inapa - Investimentos Participações e Gestão's Liabilities

According to the last reported balance sheet, Inapa - Investimentos Participações e Gestão had liabilities of €231.3m due within 12 months, and liabilities of €228.0m due beyond 12 months. Offsetting these obligations, it had cash of €9.52m as well as receivables valued at €98.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €351.7m.

This deficit casts a shadow over the €19.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Inapa - Investimentos Participações e Gestão would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Inapa - Investimentos Participações e Gestão has a debt to EBITDA ratio of 4.3 and its EBIT covered its interest expense 2.8 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Worse, Inapa - Investimentos Participações e Gestão's EBIT was down 31% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. There's no doubt that we learn most about debt from the balance sheet. But it is Inapa - Investimentos Participações e Gestão's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Happily for any shareholders, Inapa - Investimentos Participações e Gestão actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

To be frank both Inapa - Investimentos Participações e Gestão's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Overall, it seems to us that Inapa - Investimentos Participações e Gestão's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. Be aware that Inapa - Investimentos Participações e Gestão is showing 4 warning signs in our investment analysis , and 2 of those shouldn'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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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.