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. As with many other companies Global Dominion Access, S.A. (BME:DOM) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Global Dominion Access's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Global Dominion Access had €121.4m of debt, an increase on €114.3m, over one year. But it also has €159.5m in cash to offset that, meaning it has €38.1m net cash.
How Healthy Is Global Dominion Access's Balance Sheet?
We can see from the most recent balance sheet that Global Dominion Access had liabilities of €656.6m falling due within a year, and liabilities of €193.2m due beyond that. Offsetting this, it had €159.5m in cash and €374.8m in receivables that were due within 12 months. So its liabilities total €315.5m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Global Dominion Access is worth €688.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Global Dominion Access boasts net cash, so it's fair to say it does not have a heavy debt load!
We saw Global Dominion Access grow its EBIT by 7.9% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Global Dominion Access'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. While Global Dominion Access 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. During the last three years, Global Dominion Access produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Although Global Dominion Access's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €38m. So we don't have any problem with Global Dominion Access's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Global Dominion Access insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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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