Is Ibersol S.G.P.S (ELI:IBS) Using Debt Sensibly?

Warren Buffett famously said, '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 Ibersol, S.G.P.S., S.A. (ELI:IBS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ibersol S.G.P.S

What Is Ibersol S.G.P.S's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Ibersol S.G.P.S had debt of €177.9m, up from €132.8m in one year. However, because it has a cash reserve of €71.5m, its net debt is less, at about €106.3m.

How Healthy Is Ibersol S.G.P.S's Balance Sheet?

The latest balance sheet data shows that Ibersol S.G.P.S had liabilities of €161.7m due within a year, and liabilities of €421.4m falling due after that. On the other hand, it had cash of €71.5m and €32.2m worth of receivables due within a year. So its liabilities total €479.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €150.7m 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. At the end of the day, Ibersol S.G.P.S would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. 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 €343m, which is a fall of 26%. 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 €24m. 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 €30m 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. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Ibersol S.G.P.S , and understanding them should be part of your investment process.

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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