Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 D'Ieteren Group SA (EBR:DIE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does D'Ieteren Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2021 D'Ieteren Group had €166.0m of debt, an increase on €53.0m, over one year. However, its balance sheet shows it holds €898.7m in cash, so it actually has €732.7m net cash.
How Healthy Is D'Ieteren Group's Balance Sheet?
We can see from the most recent balance sheet that D'Ieteren Group had liabilities of €563.8m falling due within a year, and liabilities of €332.5m due beyond that. Offsetting these obligations, it had cash of €898.7m as well as receivables valued at €390.0m due within 12 months. So it can boast €392.4m more liquid assets than total liabilities.
This surplus suggests that D'Ieteren Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, D'Ieteren Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that D'Ieteren Group grew its EBIT by 262% over twelve months. That boost will make it even easier to pay down debt going forward. 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 D'Ieteren 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. D'Ieteren Group 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. Over the last three years, D'Ieteren Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While it is always sensible to investigate a company's debt, in this case D'Ieteren Group has €732.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €129m, being 105% of its EBIT. So we don't think D'Ieteren Group's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of D'Ieteren Group's earnings per share history for free.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.