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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Danieli & C. Officine Meccaniche S.p.A. (BIT:DAN) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Danieli & C. Officine Meccaniche

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

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Danieli & C. Officine Meccaniche had €1.02b of debt, an increase on €183.2m, over one year. But on the other hand it also has €2.72b in cash, leading to a €1.70b net cash position.

How Strong Is Danieli & C. Officine Meccaniche's Balance Sheet?

The latest balance sheet data shows that Danieli & C. Officine Meccaniche had liabilities of €4.06b due within a year, and liabilities of €666.8m falling due after that. On the other hand, it had cash of €2.72b and €1.34b worth of receivables due within a year. So its liabilities total €661.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Danieli & C. Officine Meccaniche has a market capitalization of €2.14b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Danieli & C. Officine Meccaniche boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Danieli & C. Officine Meccaniche grew its EBIT by 20% last year, making its debt load easier to handle. 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 Danieli & C. Officine Meccaniche 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, Danieli & C. Officine Meccaniche actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Danieli & C. Officine Meccaniche's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €1.70b. And it impressed us with free cash flow of €479m, being 131% of its EBIT. So we don't think Danieli & C. Officine Meccaniche's use of debt is risky. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.