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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Danieli & C. Officine Meccaniche S.p.A. (BIT:DAN) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Danieli & C. Officine Meccaniche

How Much Debt Does Danieli & C. Officine Meccaniche Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Danieli & C. Officine Meccaniche had €682.1m of debt, an increase on €508.9m, over one year. But on the other hand it also has €2.32b in cash, leading to a €1.64b net cash position.

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

Zooming in on the latest balance sheet data, we can see that Danieli & C. Officine Meccaniche had liabilities of €3.75b due within 12 months and liabilities of €387.9m due beyond that. Offsetting this, it had €2.32b in cash and €1.20b in receivables that were due within 12 months. So its liabilities total €618.9m more than the combination of its cash and short-term receivables.

Danieli & C. Officine Meccaniche has a market capitalization of €1.78b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. 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!

Another good sign is that Danieli & C. Officine Meccaniche has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. 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. 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. Looking at the most recent three years, Danieli & C. Officine Meccaniche recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Danieli & C. Officine Meccaniche does have more liabilities than liquid assets, it also has net cash of €1.64b. And it impressed us with its EBIT growth of 21% over the last year. So we are not troubled with Danieli & C. Officine Meccaniche's debt use. 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.