Is Dassault Aviation (EPA:AM) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Dassault Aviation SA (EPA:AM) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dassault Aviation

What Is Dassault Aviation's Net Debt?

As you can see below, Dassault Aviation had €147.2m of debt at June 2020, down from €970.6m a year prior. However, it does have €4.07b in cash offsetting this, leading to net cash of €3.92b.

How Healthy Is Dassault Aviation's Balance Sheet?

We can see from the most recent balance sheet that Dassault Aviation had liabilities of €9.89b falling due within a year, and liabilities of €251.7m due beyond that. Offsetting this, it had €4.07b in cash and €1.40b in receivables that were due within 12 months. So its liabilities total €4.67b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €7.49b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Dassault Aviation boasts net cash, so it's fair to say it does not have a heavy debt load!

While Dassault Aviation doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Dassault Aviation 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. 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. In the last three years, Dassault Aviation's free cash flow amounted to 42% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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 €3.92b. So we don't have any problem with Dassault Aviation's use of debt. 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 Dassault Aviation that you should be aware of.

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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