Is De'Longhi (BIT:DLG) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies De'Longhi S.p.A. (BIT:DLG) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 De'Longhi

What Is De'Longhi's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 De'Longhi had debt of €547.4m, up from €417.4m in one year. However, its balance sheet shows it holds €912.2m in cash, so it actually has €364.8m net cash.

How Healthy Is De'Longhi's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that De'Longhi had liabilities of €659.6m due within 12 months and liabilities of €596.9m due beyond that. Offsetting these obligations, it had cash of €912.2m as well as receivables valued at €415.3m due within 12 months. So it actually has €71.0m more liquid assets than total liabilities.

This state of affairs indicates that De'Longhi'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 €4.95b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, De'Longhi boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that De'Longhi grew its EBIT by 16% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine De'Longhi'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. 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 puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case De'Longhi has €364.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €422m, being 81% of its EBIT. So is De'Longhi's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 2 warning signs we've spotted with De'Longhi .

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. 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.
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