Is Dassault Systèmes (EPA:DSY) Using Too Much Debt?

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. As with many other companies Dassault Systèmes SE (EPA:DSY) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Dassault Systèmes

How Much Debt Does Dassault Systèmes Carry?

As you can see below, Dassault Systèmes had €3.01b of debt at March 2023, down from €3.64b a year prior. However, it does have €3.47b in cash offsetting this, leading to net cash of €459.2m.

A Look At Dassault Systèmes' Liabilities

The latest balance sheet data shows that Dassault Systèmes had liabilities of €2.85b due within a year, and liabilities of €4.02b falling due after that. On the other hand, it had cash of €3.47b and €1.31b worth of receivables due within a year. So it has liabilities totalling €2.09b more than its cash and near-term receivables, combined.

Of course, Dassault Systèmes has a titanic market capitalization of €48.2b, so these liabilities are probably manageable. 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.

Also good is that Dassault Systèmes grew its EBIT at 12% over the last year, further increasing its ability to manage debt. 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 Systèmes can strengthen its balance sheet over time. 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. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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 €459.2m. The cherry on top was that in converted 135% of that EBIT to free cash flow, bringing in €1.5b. 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.

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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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.