Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Dovre Group Plc (HEL:DOV1V) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Dovre Group
What Is Dovre Group's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Dovre Group had €4.61m of debt, an increase on €3.82m, over one year. But on the other hand it also has €8.54m in cash, leading to a €3.93m net cash position.
A Look At Dovre Group's Liabilities
The latest balance sheet data shows that Dovre Group had liabilities of €17.8m due within a year, and liabilities of €2.84m falling due after that. Offsetting this, it had €8.54m in cash and €13.6m in receivables that were due within 12 months. So it actually has €1.48m more liquid assets than total liabilities.
This surplus suggests that Dovre Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Dovre Group boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Dovre Group grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dovre Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Dovre Group 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. Happily for any shareholders, Dovre Group 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 it is always sensible to investigate a company's debt, in this case Dovre Group has €3.93m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €4.2m, being 128% of its EBIT. So is Dovre Group'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. Be aware that Dovre Group is showing 2 warning signs in our investment analysis , you should know about...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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About HLSE:DOV1V
Reasonable growth potential slight.
