Is Directa Plus (LON:DCTA) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Directa Plus Plc (LON:DCTA) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Directa Plus

What Is Directa Plus's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Directa Plus had €2.31m of debt, an increase on €1.83m, over one year. However, its balance sheet shows it holds €4.24m in cash, so it actually has €1.93m net cash.

How Strong Is Directa Plus' Balance Sheet?

According to the last reported balance sheet, Directa Plus had liabilities of €2.64m due within 12 months, and liabilities of €2.61m due beyond 12 months. Offsetting this, it had €4.24m in cash and €3.44m in receivables that were due within 12 months. So it can boast €2.43m 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! 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.

Over 12 months, Directa Plus made a loss at the EBIT level, and saw its revenue drop to €9.9m, which is a fall of 2.3%. That's not what we would hope to see.

So How Risky Is Directa Plus?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Directa Plus had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €3.8m of cash and made a loss of €4.4m. But the saving grace is the €1.93m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Directa Plus , and understanding them should be part of your investment process.

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.