Is Directa Plus (LON:DCTA) Using Debt Sensibly?

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 note that Directa Plus Plc (LON:DCTA) does have debt on its balance sheet. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out the opportunities and risks within the GB Chemicals industry.

How Much Debt Does Directa Plus Carry?

You can click the graphic below for the historical numbers, but it shows that Directa Plus had €1.83m of debt in June 2022, down from €1.92m, one year before. However, its balance sheet shows it holds €7.78m in cash, so it actually has €5.95m net cash.

How Strong Is Directa Plus' Balance Sheet?

The latest balance sheet data shows that Directa Plus had liabilities of €2.22m due within a year, and liabilities of €2.71m falling due after that. On the other hand, it had cash of €7.78m and €3.05m worth of receivables due within a year. So it actually has €5.90m more liquid assets than total liabilities.

This surplus suggests that Directa Plus has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Directa Plus boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Directa Plus 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.

Over 12 months, Directa Plus reported revenue of €10m, which is a gain of 34%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Directa Plus?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Directa Plus had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of €4.7m and booked a €4.4m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of €5.95m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Directa Plus may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Directa Plus has 2 warning signs we think you should be aware of.

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.

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

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.