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Is Directa Plus (LON:DCTA) Using Debt Sensibly?

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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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Directa Plus Plc (LON:DCTA) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Directa Plus

How Much Debt Does Directa Plus Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Directa Plus had €2.47m of debt, an increase on €2.00m, over one year. However, its balance sheet shows it holds €11.1m in cash, so it actually has €8.66m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Directa Plus' Balance Sheet?

The latest balance sheet data shows that Directa Plus had liabilities of €2.22m due within a year, and liabilities of €3.52m falling due after that. Offsetting these obligations, it had cash of €11.1m as well as receivables valued at €3.03m due within 12 months. So it can boast €8.42m more liquid assets than total liabilities.

This short term liquidity is a sign that Directa Plus could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Directa Plus boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Directa Plus can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Directa Plus reported revenue of €8.6m, which is a gain of 34%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Directa Plus?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Directa Plus had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €4.6m and booked a €3.7m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of €8.66m. That means it could keep spending at its current rate for more than two years. Directa Plus's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Directa Plus you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.