Is Danieli & C. Officine Meccaniche (BIT:DAN) Using Too Much Debt?

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.' 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 can see that Danieli & C. Officine Meccaniche S.p.A. (BIT:DAN) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Danieli & C. Officine Meccaniche had €652.9m of debt, an increase on €543.3m, over one year. But it also has €1.78b in cash to offset that, meaning it has €1.13b net cash.

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

We can see from the most recent balance sheet that Danieli & C. Officine Meccaniche had liabilities of €3.23b falling due within a year, and liabilities of €381.5m due beyond that. Offsetting this, it had €1.78b in cash and €1.05b in receivables that were due within 12 months. So it has liabilities totalling €772.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Danieli & C. Officine Meccaniche has a market capitalization of €1.30b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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.

Fortunately, Danieli & C. Officine Meccaniche grew its EBIT by 8.9% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Danieli & C. Officine Meccaniche has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Danieli & C. Officine Meccaniche's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 €1.13b. On top of that, it increased its EBIT by 8.9% in the last twelve months. So we don't have any problem with Danieli & C. Officine Meccaniche's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Danieli & C. Officine Meccaniche, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.