Is D'Ieteren Group (EBR:DIE) A Risky Investment?

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 D'Ieteren Group SA (EBR:DIE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for D'Ieteren Group

How Much Debt Does D'Ieteren Group Carry?

The image below, which you can click on for greater detail, shows that D'Ieteren Group had debt of €130.7m at the end of June 2021, a reduction from €189.9m over a year. But it also has €1.83b in cash to offset that, meaning it has €1.70b net cash.

How Healthy Is D'Ieteren Group's Balance Sheet?

According to the last reported balance sheet, D'Ieteren Group had liabilities of €561.1m due within 12 months, and liabilities of €242.2m due beyond 12 months. Offsetting this, it had €1.83b in cash and €449.6m in receivables that were due within 12 months. So it can boast €1.48b more liquid assets than total liabilities.

This surplus suggests that D'Ieteren Group is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that D'Ieteren Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, D'Ieteren Group grew its EBIT by 153% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine D'Ieteren Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While D'Ieteren Group 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, D'Ieteren Group produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that D'Ieteren Group has net cash of €1.70b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 153% over the last year. So is D'Ieteren Group's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with D'Ieteren Group (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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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.
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