Dassault Systèmes (EPA:DSY) Has A Rock Solid Balance Sheet

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Dassault Systèmes SE (EPA:DSY) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dassault Systèmes

How Much Debt Does Dassault Systèmes Carry?

As you can see below, Dassault Systèmes had €2.99b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has €3.57b in cash to offset that, meaning it has €577.6m net cash.

How Strong Is Dassault Systèmes' Balance Sheet?

The latest balance sheet data shows that Dassault Systèmes had liabilities of €3.56b due within a year, and liabilities of €3.22b falling due after that. Offsetting these obligations, it had cash of €3.57b as well as receivables valued at €1.73b due within 12 months. So its liabilities total €1.47b more than the combination of its cash and short-term receivables.

Given Dassault Systèmes has a humongous market capitalization of €57.2b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Dassault Systèmes also has more cash than debt, so we're pretty confident it can manage its debt safely.

While Dassault Systèmes doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Systèmes'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 Systèmes 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 Systèmes actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Dassault Systèmes's liabilities, but we can be reassured by the fact it has has net cash of €577.6m. And it impressed us with free cash flow of €1.4b, being 118% of its EBIT. So we don't think Dassault Systèmes's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Dassault Systèmes, you may well want to click here to check an interactive graph of its earnings per share history.

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.