These 4 Measures Indicate That Dürr (ETR:DUE) Is Using Debt Extensively

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. We note that Dürr Aktiengesellschaft (ETR:DUE) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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.

See our latest analysis for Dürr

What Is Dürr's Debt?

As you can see below, Dürr had €675.5m of debt at June 2021, down from €813.6m a year prior. However, its balance sheet shows it holds €872.0m in cash, so it actually has €196.5m net cash.

How Healthy Is Dürr's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dürr had liabilities of €1.99b due within 12 months and liabilities of €1.06b due beyond that. Offsetting this, it had €872.0m in cash and €962.9m in receivables that were due within 12 months. So its liabilities total €1.21b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Dürr has a market capitalization of €2.81b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

Importantly, Dürr's EBIT fell a jaw-dropping 39% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dürr 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.

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. Over the last three years, Dürr actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Dürr does have more liabilities than liquid assets, it also has net cash of €196.5m. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in €187m. So although we see some areas for improvement, we're not too worried about Dürr's balance sheet. 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 2 warning signs for Dürr you should be aware of, and 1 of them makes us a bit uncomfortable.

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. 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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