Here's Why Dassault Aviation société anonyme (EPA:AM) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dassault Aviation société anonyme

How Much Debt Does Dassault Aviation société anonyme Carry?

You can click the graphic below for the historical numbers, but it shows that Dassault Aviation société anonyme had €77.9m of debt in December 2023, down from €97.9m, one year before. However, its balance sheet shows it holds €7.37b in cash, so it actually has €7.29b net cash.

A Look At Dassault Aviation société anonyme's Liabilities

According to the last reported balance sheet, Dassault Aviation société anonyme had liabilities of €17.5b due within 12 months, and liabilities of €210.2m due beyond 12 months. Offsetting this, it had €7.37b in cash and €1.35b in receivables that were due within 12 months. So its liabilities total €9.03b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Dassault Aviation société anonyme is worth a massive €16.1b, 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. 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!

It is just as well that Dassault Aviation société anonyme's load is not too heavy, because its EBIT was down 44% over the last year. 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 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, while the tax-man may adore accounting profits, lenders only accept 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. 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

Although Dassault Aviation société anonyme's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €7.29b. The cherry on top was that in converted 366% of that EBIT to free cash flow, bringing in -€1.0b. So we don't have any problem with Dassault Aviation société anonyme's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Dassault Aviation société anonyme is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.