Industrie De Nora (BIT:DNR) Has A Pretty Healthy Balance Sheet

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.' 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 Industrie De Nora S.p.A. (BIT:DNR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Industrie De Nora

What Is Industrie De Nora's Debt?

The chart below, which you can click on for greater detail, shows that Industrie De Nora had €132.2m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds €181.6m in cash, so it actually has €49.4m 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 €248.6m falling due within a year, and liabilities of €175.2m due beyond that. Offsetting this, it had €181.6m in cash and €226.6m in receivables that were due within 12 months. So it has liabilities totalling €15.6m more than its cash and near-term receivables, combined.

This state of affairs indicates that Industrie De Nora's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €1.86b 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 5.3% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Industrie De Nora 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. In the last three years, Industrie De Nora's free cash flow amounted to 38% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Industrie De Nora's liabilities, but we can be reassured by the fact it has has net cash of €49.4m. So we are not troubled with Industrie De Nora's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Industrie De Nora you should be aware of.

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.