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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Dassault Aviation Société anonyme (EPA:AM) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Dassault Aviation Société anonyme

What Is Dassault Aviation Société anonyme's Debt?

The chart below, which you can click on for greater detail, shows that Dassault Aviation Société anonyme had €97.9m in debt in December 2022; about the same as the year before. However, its balance sheet shows it holds €9.63b in cash, so it actually has €9.53b net cash.

A Look At Dassault Aviation Société anonyme's Liabilities

We can see from the most recent balance sheet that Dassault Aviation Société anonyme had liabilities of €16.3b falling due within a year, and liabilities of €193.7m due beyond that. On the other hand, it had cash of €9.63b and €1.68b worth of receivables due within a year. So it has liabilities totalling €5.23b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Dassault Aviation Société anonyme is worth a massive €14.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

And we also note warmly that Dassault Aviation Société anonyme grew its EBIT by 11% last year, making its debt load easier to handle. 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 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Dassault Aviation Société anonyme actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Dassault Aviation Société anonyme does have more liabilities than liquid assets, it also has net cash of €9.53b. The cherry on top was that in converted 378% of that EBIT to free cash flow, bringing in €4.9b. So we don't think Dassault Aviation Société anonyme's use of debt is risky. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.