Global Dominion Access (BME:DOM) Takes On Some Risk With Its Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Global Dominion Access, S.A. (BME:DOM) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Global Dominion Access

How Much Debt Does Global Dominion Access Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Global Dominion Access had debt of €133.0m, up from €85.4m in one year. But on the other hand it also has €278.7m in cash, leading to a €145.7m net cash position.

How Healthy Is Global Dominion Access' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Global Dominion Access had liabilities of €684.0m due within 12 months and liabilities of €267.7m due beyond that. Offsetting these obligations, it had cash of €278.7m as well as receivables valued at €372.9m due within 12 months. So its liabilities total €300.1m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Global Dominion Access has a market capitalization of €707.0m, 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, Global Dominion Access also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Global Dominion Access's EBIT was down 45% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Global Dominion Access'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Global Dominion Access 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, Global Dominion Access generated free cash flow amounting to a very robust 100% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

Although Global Dominion Access's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €145.7m. And it impressed us with free cash flow of €47m, being 100% of its EBIT. So although we see some areas for improvement, we're not too worried about Global Dominion Access's balance sheet. 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. Be aware that Global Dominion Access is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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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