Here's Why Dürr (ETR:DUE) Can Manage Its Debt Responsibly

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. Importantly, Dürr Aktiengesellschaft (ETR:DUE) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Dürr

What Is Dürr's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Dürr had €845.1m of debt, an increase on €802.4m, over one year. However, it does have €861.5m in cash offsetting this, leading to net cash of €16.5m.

A Look At Dürr's Liabilities

We can see from the most recent balance sheet that Dürr had liabilities of €2.45b falling due within a year, and liabilities of €994.5m due beyond that. On the other hand, it had cash of €861.5m and €1.16b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.42b.

This deficit is considerable relative to its market capitalization of €1.46b, so it does suggest shareholders should keep an eye on Dürr's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Dürr also has more cash than debt, so we're pretty confident it can manage its debt safely.

Pleasingly, Dürr is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 195% gain in the last twelve months. 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 Dürr 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Dürr 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, Dürr actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Dürr does have more liabilities than liquid assets, it also has net cash of €16.5m. And it impressed us with free cash flow of €103m, being 174% of its EBIT. So we are not troubled with Dürr'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Dürr you should know about.

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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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.