Is DO & CO (VIE:DOC) Using Debt In A Risky Way?

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, DO & CO Aktiengesellschaft (VIE:DOC) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for DO & CO

How Much Debt Does DO & CO Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 DO & CO had €469.1m of debt, an increase on €291.5m, over one year. However, it does have €298.0m in cash offsetting this, leading to net debt of about €171.1m.

How Healthy Is DO & CO's Balance Sheet?

According to the last reported balance sheet, DO & CO had liabilities of €338.1m due within 12 months, and liabilities of €488.9m due beyond 12 months. Offsetting these obligations, it had cash of €298.0m as well as receivables valued at €45.5m due within 12 months. So it has liabilities totalling €483.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €526.2m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if DO & CO 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.

Over 12 months, DO & CO made a loss at the EBIT level, and saw its revenue drop to €539m, which is a fall of 42%. That makes us nervous, to say the least.

Caveat Emptor

Not only did DO & CO's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost €40m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €21m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for DO & CO (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.

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