Danieli & C. Officine Meccaniche (BIT:DAN) Seems To Use Debt Rather Sparingly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Danieli & C. Officine Meccaniche S.p.A. (BIT:DAN) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Danieli & C. Officine Meccaniche

What Is Danieli & C. Officine Meccaniche's Net Debt?

As you can see below, Danieli & C. Officine Meccaniche had €183.2m of debt at December 2022, down from €652.9m a year prior. However, its balance sheet shows it holds €1.97b in cash, so it actually has €1.79b net cash.

A Look At Danieli & C. Officine Meccaniche's Liabilities

According to the last reported balance sheet, Danieli & C. Officine Meccaniche had liabilities of €3.80b due within 12 months, and liabilities of €231.4m due beyond 12 months. On the other hand, it had cash of €1.97b and €1.20b worth of receivables due within a year. So its liabilities total €864.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Danieli & C. Officine Meccaniche is worth €1.60b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Danieli & C. Officine Meccaniche also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Danieli & C. Officine Meccaniche has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Danieli & C. Officine Meccaniche's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Danieli & C. Officine Meccaniche may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Danieli & C. Officine Meccaniche generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Danieli & C. Officine Meccaniche does have more liabilities than liquid assets, it also has net cash of €1.79b. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in €393m. So is Danieli & C. Officine Meccaniche's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Danieli & C. Officine Meccaniche's earnings per share history for free.

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.