Health Check: How Prudently Does Dowlais Group (LON:DWL) Use 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. We can see that Dowlais Group plc (LON:DWL) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Dowlais Group

How Much Debt Does Dowlais Group Carry?

As you can see below, at the end of June 2024, Dowlais Group had UK£1.21b of debt, up from UK£1.15b a year ago. Click the image for more detail. However, it does have UK£298.0m in cash offsetting this, leading to net debt of about UK£915.0m.

A Look At Dowlais Group's Liabilities

According to the last reported balance sheet, Dowlais Group had liabilities of UK£1.39b due within 12 months, and liabilities of UK£2.19b due beyond 12 months. Offsetting this, it had UK£298.0m in cash and UK£668.0m in receivables that were due within 12 months. So it has liabilities totalling UK£2.61b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the UK£759.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Dowlais Group would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Dowlais 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.

In the last year Dowlais Group had a loss before interest and tax, and actually shrunk its revenue by 6.3%, to UK£4.6b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Dowlais Group produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping UK£101m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through UK£84m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. Case in point: We've spotted 2 warning signs for Dowlais Group you should be aware of, and 1 of them is concerning.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.