We Think Danieli & C. Officine Meccaniche (BIT:DAN) Can Stay On Top Of Its Debt

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 note that Danieli & C. Officine Meccaniche S.p.A. (BIT:DAN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Danieli & C. Officine Meccaniche

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

The chart below, which you can click on for greater detail, shows that Danieli & C. Officine Meccaniche had €541.9m in debt in June 2021; about the same as the year before. However, it does have €1.66b in cash offsetting this, leading to net cash of €1.12b.

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

The latest balance sheet data shows that Danieli & C. Officine Meccaniche had liabilities of €2.99b due within a year, and liabilities of €448.5m falling due after that. Offsetting this, it had €1.66b in cash and €1.03b in receivables that were due within 12 months. So its liabilities total €744.2m 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 €1.65b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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!

On top of that, Danieli & C. Officine Meccaniche grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. During the last three years, Danieli & C. Officine Meccaniche produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 €1.12b. And we liked the look of last year's 44% year-on-year EBIT growth. 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.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.