Does Industrie De Nora (BIT:DNR) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Industrie De Nora S.p.A. (BIT:DNR) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Industrie De Nora

How Much Debt Does Industrie De Nora Carry?

The image below, which you can click on for greater detail, shows that Industrie De Nora had debt of €131.6m at the end of September 2023, a reduction from €279.6m over a year. However, it does have €182.2m in cash offsetting this, leading to net cash of €50.6m.

How Strong Is Industrie De Nora's Balance Sheet?

We can see from the most recent balance sheet that Industrie De Nora had liabilities of €229.6m falling due within a year, and liabilities of €161.8m due beyond that. Offsetting this, it had €182.2m in cash and €201.3m in receivables that were due within 12 months. So it has liabilities totalling €7.94m more than its cash and near-term receivables, combined.

Having regard to Industrie De Nora's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €2.86b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Industrie De Nora boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Industrie De Nora's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Industrie De Nora'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Industrie De Nora 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. Over the last three years, Industrie De Nora reported free cash flow worth 17% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Industrie De Nora has €50.6m in net cash. So we are not troubled with Industrie De Nora's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Industrie De Nora has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

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.

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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.