Is Directa Plus (LON:DCTA) Using Too Much Debt?

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. As with many other companies Directa Plus Plc (LON:DCTA) makes use of debt. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Directa Plus Carry?

As you can see below, Directa Plus had €1.71m of debt at December 2024, down from €2.27m a year prior. But on the other hand it also has €4.98m in cash, leading to a €3.28m net cash position.

A Look At Directa Plus' Liabilities

The latest balance sheet data shows that Directa Plus had liabilities of €3.08m due within a year, and liabilities of €1.51m falling due after that. Offsetting this, it had €4.98m in cash and €1.94m in receivables that were due within 12 months. So it actually has €2.33m more liquid assets than total liabilities.

This surplus suggests that Directa Plus is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Directa Plus boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Directa Plus 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.

View our latest analysis for Directa Plus

Over 12 months, Directa Plus made a loss at the EBIT level, and saw its revenue drop to €6.7m, which is a fall of 37%. To be frank that doesn't bode well.

So How Risky Is Directa Plus?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Directa Plus lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €2.7m and booked a €5.1m accounting loss. However, it has net cash of €3.28m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Directa Plus (including 2 which make us uncomfortable) .

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.