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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Dassault Aviation société anonyme (EPA:AM) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Dassault Aviation société anonyme

What Is Dassault Aviation société anonyme's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Dassault Aviation société anonyme had €53.2m of debt in June 2024, down from €80.9m, one year before. However, it does have €8.84b in cash offsetting this, leading to net cash of €8.79b.

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

According to the last reported balance sheet, Dassault Aviation société anonyme had liabilities of €21.7b due within 12 months, and liabilities of €180.3m due beyond 12 months. On the other hand, it had cash of €8.84b and €1.52b worth of receivables due within a year. So its liabilities total €11.5b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its very significant market capitalization of €14.5b, so it does suggest shareholders should keep an eye on Dassault Aviation société anonyme's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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 33% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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. Dassault Aviation société anonyme 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. 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 €8.79b. The cherry on top was that in converted 488% 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Dassault Aviation société anonyme you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.