Dassault Aviation Société anonyme (EPA:AM) Seems To Use Debt Rather Sparingly

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. As with many other companies Dassault Aviation Société anonyme (EPA:AM) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that AM is potentially undervalued!

What Is Dassault Aviation Société anonyme's Net Debt?

The chart below, which you can click on for greater detail, shows that Dassault Aviation Société anonyme had €102.7m in debt in June 2022; about the same as the year before. However, its balance sheet shows it holds €6.38b in cash, so it actually has €6.28b net cash.

How Strong Is Dassault Aviation Société anonyme's Balance Sheet?

We can see from the most recent balance sheet that Dassault Aviation Société anonyme had liabilities of €13.2b falling due within a year, and liabilities of €192.3m due beyond that. Offsetting these obligations, it had cash of €6.38b as well as receivables valued at €2.03b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.98b.

This deficit isn't so bad because Dassault Aviation Société anonyme is worth a massive €12.2b, 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. While it does have liabilities worth noting, Dassault Aviation Société anonyme also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Dassault Aviation Société anonyme has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. 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 Société anonyme 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Dassault Aviation Société anonyme 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, Dassault Aviation Société anonyme 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 Dassault Aviation Société anonyme does have more liabilities than liquid assets, it also has net cash of €6.28b. And it impressed us with free cash flow of €3.0b, being 125% of its EBIT. So is Dassault Aviation Société anonyme's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Dassault Aviation Société anonyme, you may well want to click here to check an interactive graph of its earnings per share history.

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.