Does Delorean (ASX:DEL) Have A Healthy Balance Sheet?

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.' 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. We can see that Delorean Corporation Limited (ASX:DEL) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Delorean

What Is Delorean's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Delorean had AU$6.88m of debt, an increase on AU$5.53m, over one year. However, it does have AU$8.84m in cash offsetting this, leading to net cash of AU$1.97m.

How Strong Is Delorean's Balance Sheet?

The latest balance sheet data shows that Delorean had liabilities of AU$15.5m due within a year, and liabilities of AU$3.75m falling due after that. Offsetting these obligations, it had cash of AU$8.84m as well as receivables valued at AU$629.5k due within 12 months. So it has liabilities totalling AU$9.81m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Delorean is worth AU$38.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Delorean also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Delorean made a loss at the EBIT level, last year, but improved that to positive EBIT of AU$4.7m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Delorean will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Delorean may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Delorean actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Delorean's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$1.97m. And it impressed us with free cash flow of AU$6.9m, being 148% of its EBIT. So we are not troubled with Delorean's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Delorean you should be aware of.

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.