Dassault Systèmes (EPA:DSY) Has A Rock Solid 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Dassault Systèmes SE (EPA:DSY) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dassault Systèmes

What Is Dassault Systèmes's Net Debt?

The chart below, which you can click on for greater detail, shows that Dassault Systèmes had €2.99b in debt in March 2024; about the same as the year before. However, it does have €4.10b in cash offsetting this, leading to net cash of €1.10b.

How Strong Is Dassault Systèmes' Balance Sheet?

The latest balance sheet data shows that Dassault Systèmes had liabilities of €3.57b due within a year, and liabilities of €3.22b falling due after that. On the other hand, it had cash of €4.10b and €1.60b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.10b.

Given Dassault Systèmes has a humongous market capitalization of €45.3b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

Fortunately, Dassault Systèmes grew its EBIT by 3.5% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Dassault Systèmes 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. Happily for any shareholders, Dassault Systèmes actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Dassault Systèmes has €1.10b in net cash. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in €1.3b. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com