Health Check: How Prudently Does Ibersol S.G.P.S (ELI:IBS) Use 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. We can see that Ibersol, S.G.P.S., S.A. (ELI:IBS) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Ibersol S.G.P.S

How Much Debt Does Ibersol S.G.P.S Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Ibersol S.G.P.S had €165.1m of debt, an increase on €121.3m, over one year. However, it also had €52.2m in cash, and so its net debt is €112.9m.

A Look At Ibersol S.G.P.S' Liabilities

We can see from the most recent balance sheet that Ibersol S.G.P.S had liabilities of €168.2m falling due within a year, and liabilities of €404.1m due beyond that. Offsetting this, it had €52.2m in cash and €169.2k in receivables that were due within 12 months. So its liabilities total €520.0m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €189.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Ibersol S.G.P.S would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ibersol S.G.P.S 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.

Over 12 months, Ibersol S.G.P.S made a loss at the EBIT level, and saw its revenue drop to €289m, which is a fall of 40%. That makes us nervous, to say the least.

Caveat Emptor

While Ibersol S.G.P.S's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping €51m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of €55m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Ibersol S.G.P.S is showing 1 warning sign in our investment analysis , you should know about...

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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