Does DLSI (EPA:ALDLS) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that DLSI (EPA:ALDLS) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for DLSI

How Much Debt Does DLSI Carry?

As you can see below, at the end of December 2020, DLSI had €16.0m of debt, up from €14.4m a year ago. Click the image for more detail. However, it does have €19.6m in cash offsetting this, leading to net cash of €3.59m.

How Healthy Is DLSI's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DLSI had liabilities of €57.5m due within 12 months and liabilities of €8.78m due beyond that. Offsetting these obligations, it had cash of €19.6m as well as receivables valued at €50.8m due within 12 months. So it actually has €4.13m more liquid assets than total liabilities.

This surplus suggests that DLSI has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, DLSI boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for DLSI if management cannot prevent a repeat of the 82% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is DLSI's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While DLSI 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, DLSI 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 we empathize with investors who find debt concerning, you should keep in mind that DLSI has net cash of €3.59m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €9.8m, being 121% of its EBIT. So we are not troubled with DLSI's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for DLSI (1 shouldn't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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