These 4 Measures Indicate That Industrie De Nora (BIT:DNR) Is Using Debt Reasonably Well

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 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. We can see that Industrie De Nora S.p.A. (BIT:DNR) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Industrie De Nora

What Is Industrie De Nora's Debt?

As you can see below, at the end of June 2024, Industrie De Nora had €134.0m of debt, up from €126.4m a year ago. Click the image for more detail. But it also has €168.9m in cash to offset that, meaning it has €34.9m net cash.

How Strong Is Industrie De Nora's Balance Sheet?

According to the last reported balance sheet, Industrie De Nora had liabilities of €247.4m due within 12 months, and liabilities of €178.2m due beyond 12 months. Offsetting these obligations, it had cash of €168.9m as well as receivables valued at €227.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €28.8m.

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 while it's hard to imagine that the €1.75b 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 saw its EBIT drop by 4.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Industrie De Nora 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 29% 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 €34.9m. So we are not troubled with Industrie De Nora's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Industrie De Nora , and understanding them should be part of your investment process.

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.