Is Impresa - Sociedade Gestora de Participações Sociais (ELI:IPR) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Impresa - Sociedade Gestora de Participações Sociais, S.A. (ELI:IPR) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Impresa - Sociedade Gestora de Participações Sociais's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Impresa - Sociedade Gestora de Participações Sociais had debt of €148.1m, up from €125.0m in one year. On the flip side, it has €22.1m in cash leading to net debt of about €126.0m.

How Strong Is Impresa - Sociedade Gestora de Participações Sociais' Balance Sheet?

We can see from the most recent balance sheet that Impresa - Sociedade Gestora de Participações Sociais had liabilities of €138.7m falling due within a year, and liabilities of €112.0m due beyond that. Offsetting these obligations, it had cash of €22.1m as well as receivables valued at €29.0m due within 12 months. So its liabilities total €199.7m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the €19.7m 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, Impresa - Sociedade Gestora de Participações Sociais would probably need a major re-capitalization if its creditors were to demand repayment.

See our latest analysis for Impresa - Sociedade Gestora de Participações Sociais

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 1.2 times and a disturbingly high net debt to EBITDA ratio of 7.9 hit our confidence in Impresa - Sociedade Gestora de Participações Sociais like a one-two punch to the gut. The debt burden here is substantial. On a lighter note, we note that Impresa - Sociedade Gestora de Participações Sociais grew its EBIT by 25% in the last year. If it can maintain that kind of improvement, its debt load will begin to melt away like glaciers in a warming world. When analysing debt levels, the balance sheet is the obvious place to start. But it is Impresa - Sociedade Gestora de Participações Sociais'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 it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, Impresa - Sociedade Gestora de Participações Sociais actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

To be frank both Impresa - Sociedade Gestora de Participações Sociais's interest cover 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. Once we consider all the factors above, together, it seems to us that Impresa - Sociedade Gestora de Participações Sociais's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. 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 3 warning signs for Impresa - Sociedade Gestora de Participações Sociais (2 can't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.