Delta Plus Group (EPA:ALDLT) Has A Pretty Healthy Balance Sheet

April 23, 2022
  •  Updated
November 12, 2022
ENXTPA:ALDLT
Source: Shutterstock

Warren Buffett famously said, '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. Importantly, Delta Plus Group (EPA:ALDLT) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

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What Is Delta Plus Group's Debt?

As you can see below, at the end of December 2021, Delta Plus Group had €146.8m of debt, up from €129.4m a year ago. Click the image for more detail. However, it also had €55.5m in cash, and so its net debt is €91.3m.

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ENXTPA:ALDLT Debt to Equity History April 23rd 2022

A Look At Delta Plus Group's Liabilities

The latest balance sheet data shows that Delta Plus Group had liabilities of €138.5m due within a year, and liabilities of €112.0m falling due after that. On the other hand, it had cash of €55.5m and €79.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €115.7m.

Since publicly traded Delta Plus Group shares are worth a total of €595.6m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Delta Plus Group's net debt to EBITDA ratio of about 1.8 suggests only moderate use of debt. And its strong interest cover of 22.9 times, makes us even more comfortable. One way Delta Plus Group could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 11%, as it did over the last year. 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 Delta Plus Group 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 company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, Delta Plus Group recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Delta Plus Group's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And its EBIT growth rate is good too. All these things considered, it appears that Delta Plus Group can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Delta Plus Group you should know about.

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.

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