Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Industria de Diseño Textil, S.A. (BME:ITX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. 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. 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 Industria de Diseño Textil
You can click the graphic below for the historical numbers, but it shows that as of April 2022 Industria de Diseño Textil had €23.0m of debt, an increase on €10.0m, over one year. However, it does have €9.21b in cash offsetting this, leading to net cash of €9.19b.
According to the last reported balance sheet, Industria de Diseño Textil had liabilities of €9.34b due within 12 months, and liabilities of €5.11b due beyond 12 months. Offsetting this, it had €9.21b in cash and €874.0m in receivables that were due within 12 months. So it has liabilities totalling €4.35b more than its cash and near-term receivables, combined.
Since publicly traded Industria de Diseño Textil shares are worth a very impressive total of €66.8b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Industria de Diseño Textil boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Industria de Diseño Textil has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Industria de Diseño Textil 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Industria de Diseño Textil may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Industria de Diseño Textil actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
We could understand if investors are concerned about Industria de Diseño Textil's liabilities, but we can be reassured by the fact it has has net cash of €9.19b. And it impressed us with free cash flow of €5.6b, being 121% of its EBIT. So we don't think Industria de Diseño Textil's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Industria de Diseño Textil you should know about.
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.
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Industria de Diseño Textil, S.A. engages in the retail and online distribution of clothing, footwear, accessories, and household textile products through various commercial concepts.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet with solid track record and pays a dividend.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
Industria de Diseño Textil, S.A. engages in the retail and online distribution of clothing, footwear, accessories, and household textile products through various commercial concepts.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet with solid track record and pays a dividend.
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