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

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Industrie De Nora S.p.A. (BIT:DNR) makes use of debt. 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Industrie De Nora

What Is Industrie De Nora's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Industrie De Nora had €134.7m of debt, an increase on €115.5m, over one year. But it also has €165.6m in cash to offset that, meaning it has €30.9m net cash.

A Look At Industrie De Nora's Liabilities

We can see from the most recent balance sheet that Industrie De Nora had liabilities of €257.0m falling due within a year, and liabilities of €173.9m due beyond that. Offsetting these obligations, it had cash of €165.6m as well as receivables valued at €241.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €23.5m.

Having regard to Industrie De Nora's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €2.30b company is short on cash, but still worth keeping an eye on the 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!

But the other side of the story is that Industrie De Nora saw its EBIT decline by 9.2% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Industrie De Nora created free cash flow amounting to 12% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish 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 €30.9m 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Industrie De Nora (2 can't be ignored!) that you should be aware of before investing here.

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.

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