Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Dassault Systèmes SE (EPA:DSY) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Dassault Systèmes Carry?
As you can see below, Dassault Systèmes had €1.00b of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. But on the other hand it also has €3.09b in cash, leading to a €2.09b net cash position.
How Healthy Is Dassault Systèmes's Balance Sheet?
The latest balance sheet data shows that Dassault Systèmes had liabilities of €2.16b due within a year, and liabilities of €1.71b falling due after that. Offsetting this, it had €3.09b in cash and €914.5m in receivables that were due within 12 months. So it actually has €139.9m more liquid assets than total liabilities.
This state of affairs indicates that Dassault Systèmes's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €36.2b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Dassault Systèmes has more cash than debt is arguably a good indication that it can manage its debt safely.
The good news is that Dassault Systèmes has increased its EBIT by 7.4% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dassault Systèmes 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 company can only pay off debt with cold hard cash, not accounting profits. While Dassault Systèmes has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Dassault Systèmes actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While we empathize with investors who find debt concerning, you should keep in mind that Dassault Systèmes has net cash of €2.09b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €1.1b, being 103% of its EBIT. So is Dassault Systèmes's debt a risk? It doesn't seem so to us. 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 Dassault Systèmes'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.
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