Is Dufry (VTX:DUFN) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Dufry AG (VTX:DUFN) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dufry

How Much Debt Does Dufry Carry?

You can click the graphic below for the historical numbers, but it shows that Dufry had CHF3.99b of debt in June 2021, down from CHF4.40b, one year before. However, it also had CHF641.4m in cash, and so its net debt is CHF3.35b.

How Healthy Is Dufry's Balance Sheet?

We can see from the most recent balance sheet that Dufry had liabilities of CHF2.43b falling due within a year, and liabilities of CHF7.43b due beyond that. Offsetting these obligations, it had cash of CHF641.4m as well as receivables valued at CHF487.8m due within 12 months. So its liabilities total CHF8.73b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CHF3.82b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Dufry would likely require a major re-capitalisation if it had to pay its creditors today. 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 Dufry 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, Dufry made a loss at the EBIT level, and saw its revenue drop to CHF2.2b, which is a fall of 65%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Dufry's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CHF1.4b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CHF146m over the last twelve months. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Dufry .

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.

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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