Does Dassault Aviation (EPA:AM) Have A Healthy Balance Sheet?

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.' 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 Dassault Aviation SA (EPA:AM) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Dassault Aviation

What Is Dassault Aviation's Debt?

The image below, which you can click on for greater detail, shows that Dassault Aviation had debt of €105.8m at the end of June 2021, a reduction from €147.2m over a year. But on the other hand it also has €3.61b in cash, leading to a €3.50b net cash position.

How Healthy Is Dassault Aviation's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dassault Aviation had liabilities of €8.99b due within 12 months and liabilities of €210.6m due beyond that. Offsetting these obligations, it had cash of €3.61b as well as receivables valued at €1.33b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.27b.

While this might seem like a lot, it is not so bad since Dassault Aviation has a market capitalization of €7.45b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Dassault Aviation boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Dassault Aviation's saving grace is its low debt levels, because its EBIT has tanked 30% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Dassault Aviation 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. Dassault Aviation 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, Dassault Aviation burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

Although Dassault Aviation's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €3.50b. Despite the cash, we do find Dassault Aviation's EBIT growth rate concerning, so we're not particularly comfortable with the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Dassault Aviation is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.