Here's Why Global Dominion Access (BME:DOM) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Global Dominion Access, S.A. (BME:DOM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 Global Dominion Access had debt of €210.9m at the end of June 2021, a reduction from €221.4m over a year. However, it does have €239.6m in cash offsetting this, leading to net cash of €28.6m.

A Look At Global Dominion Access' Liabilities

We can see from the most recent balance sheet that Global Dominion Access had liabilities of €733.4m falling due within a year, and liabilities of €284.3m due beyond that. On the other hand, it had cash of €239.6m and €456.2m worth of receivables due within a year. So its liabilities total €321.9m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Global Dominion Access is worth €750.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Global Dominion Access boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Global Dominion Access grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Global Dominion Access 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Global Dominion Access 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. During the last three years, Global Dominion Access generated free cash flow amounting to a very robust 93% 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 €28.6m. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in €72m. So is Global Dominion Access'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Global Dominion Access that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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