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, D'Ieteren SA (EBR:DIE) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is D'Ieteren's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 D'Ieteren had €193.8m of debt, an increase on €169.7m, over one year. But on the other hand it also has €905.1m in cash, leading to a €711.3m net cash position.
How Strong Is D'Ieteren's Balance Sheet?
According to the last reported balance sheet, D'Ieteren had liabilities of €640.4m due within 12 months, and liabilities of €324.3m due beyond 12 months. Offsetting these obligations, it had cash of €905.1m as well as receivables valued at €484.4m due within 12 months. So it can boast €424.8m more liquid assets than total liabilities.
This short term liquidity is a sign that D'Ieteren could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, D'Ieteren boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that D'Ieteren grew its EBIT by 18% last year, making its debt load easier to handle. 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 D'Ieteren's ability to maintain a healthy balance sheet going forward. 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. While D'Ieteren 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. Happily for any shareholders, D'Ieteren actually produced more free cash flow than EBIT over the last two years. 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 D'Ieteren has net cash of €711.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -€28.0m, being 223% of its EBIT. So we don't think D'Ieteren's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in D'Ieteren, you may well want to click here to check an interactive graph of its earnings per share history.
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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