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.' 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. Importantly, Bilendi SA (EPA:ALBLD) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Bilendi

What Is Bilendi's Net Debt?

The image below, which you can click on for greater detail, shows that Bilendi had debt of €3.20m at the end of December 2018, a reduction from €4.46m over a year. But on the other hand it also has €5.61m in cash, leading to a €2.41m net cash position.

A Look At Bilendi's Liabilities

We can see from the most recent balance sheet that Bilendi had liabilities of €9.55m falling due within a year, and liabilities of €6.32m due beyond that. On the other hand, it had cash of €5.61m and €10.3m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Bilendi's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €40.3m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Bilendi has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Bilendi grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Bilendi's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Bilendi 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, Bilendi reported free cash flow worth 19% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Bilendi has net cash of €2.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 27% year-on-year EBIT growth. So we are not troubled with Bilendi's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Bilendi's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.