De'Longhi (BIT:DLG) Could Easily Take On More Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, De'Longhi S.p.A. (BIT:DLG) does carry debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 De'Longhi

What Is De'Longhi's Net Debt?

As you can see below, De'Longhi had €724.1m of debt at June 2024, down from €810.8m a year prior. However, it does have €897.0m in cash offsetting this, leading to net cash of €172.9m.

How Healthy Is De'Longhi's Balance Sheet?

We can see from the most recent balance sheet that De'Longhi had liabilities of €1.28b falling due within a year, and liabilities of €765.4m due beyond that. Offsetting these obligations, it had cash of €897.0m as well as receivables valued at €233.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €911.5m.

This deficit isn't so bad because De'Longhi is worth €4.13b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, De'Longhi also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that De'Longhi has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if De'Longhi 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. De'Longhi 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. Over the last three years, De'Longhi recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While De'Longhi does have more liabilities than liquid assets, it also has net cash of €172.9m. And it impressed us with free cash flow of €431m, being 81% of its EBIT. So we don't think De'Longhi's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that De'Longhi is showing 2 warning signs in our investment analysis , 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.