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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that DBA Group S.p.A. (BIT:DBA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for DBA Group
What Is DBA Group's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 DBA Group had debt of €15.6m, up from €10.9m in one year. However, because it has a cash reserve of €5.59m, its net debt is less, at about €10.00m.
How Strong Is DBA Group's Balance Sheet?
According to the last reported balance sheet, DBA Group had liabilities of €27.7m due within 12 months, and liabilities of €5.99m due beyond 12 months. Offsetting this, it had €5.59m in cash and €24.2m in receivables that were due within 12 months. So its liabilities total €3.83m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since DBA Group has a market capitalization of €11.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if DBA Group 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.
In the last year DBA Group's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
Caveat Emptor
Importantly, DBA Group had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at €308k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €1.9m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for DBA Group (of which 1 is potentially serious!) you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.
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. Thank you for reading.
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About BIT:DBA
DBA Group
Provides consultancy, architecture, engineering, and project management services.
Flawless balance sheet with solid track record.
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Quite a lot of speculation presented as if it were evidence.You are combining alleged payment disputes, alleged bank actions, legal disputes with journalists and other unverified claims to imply that TPG’s financial reporting is somehow unreliable or that the company is approaching insolvency. That’s a very serious conclusion, but the evidence you’ve presented doesn’t establish it.TPG’s financial statements, share count, debt, cash flow and acquisitions can all be checked against official filings and corporate documents. That’s called due diligence. Repeating allegations and then pointing to a low P/E doesn’t prove anything.In fact, the P/E below 1 is precisely the reason the underlying numbers need to be investigated rather than dismissed. If you have documentary evidence that TPG’s reported figures are false, that banks actually cancelled the alleged facilities, or that the company is insolvent, publish the documents and numbers.Otherwise, this reads less like analysis and more like an attempt to create fear and selling pressure around a micro-cap stock.Claims require evidence. Allegations are not evidence.
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