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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Dassault Aviation société anonyme (EPA:AM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 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. 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.

View our latest analysis for Dassault Aviation société anonyme

How Much Debt Does Dassault Aviation société anonyme Carry?

The image below, which you can click on for greater detail, shows that Dassault Aviation société anonyme had debt of €80.9m at the end of June 2023, a reduction from €102.7m over a year. However, its balance sheet shows it holds €7.76b in cash, so it actually has €7.68b net cash.

How Healthy 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 €16.5b falling due within a year, and liabilities of €188.6m due beyond that. On the other hand, it had cash of €7.76b and €1.60b worth of receivables due within a year. So its liabilities total €7.33b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Dassault Aviation société anonyme has a huge market capitalization of €14.4b, 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 société anonyme boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Dassault Aviation société anonyme saw its EBIT decline by 8.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Dassault Aviation société anonyme's ability to maintain a healthy balance sheet going forward. 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 company can only pay off debt with cold hard cash, not accounting profits. 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 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 €7.68b. The cherry on top was that in converted 316% of that EBIT to free cash flow, bringing in €2.1b. So we don't have any problem with Dassault Aviation société anonyme's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Dassault Aviation société anonyme's earnings per share history for free.

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.

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.