These 4 Measures Indicate That De'Longhi (BIT:DLG) Is Using Debt Safely

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. We note that De'Longhi S.p.A. (BIT:DLG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for De'Longhi

How Much Debt Does De'Longhi Carry?

The image below, which you can click on for greater detail, shows that De'Longhi had debt of €828.6m at the end of September 2023, a reduction from €974.7m over a year. But on the other hand it also has €864.7m in cash, leading to a €36.1m net cash position.

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 €1.09b due within 12 months and liabilities of €802.8m due beyond that. Offsetting these obligations, it had cash of €864.7m as well as receivables valued at €460.8m due within 12 months. So its liabilities total €569.8m more than the combination of its cash and short-term receivables.

Of course, De'Longhi has a market capitalization of €4.47b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, De'Longhi boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that De'Longhi has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. 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, while the tax-man may adore accounting profits, lenders only accept 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 83% 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 De'Longhi does have more liabilities than liquid assets, it also has net cash of €36.1m. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in €391m. So is De'Longhi's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of De'Longhi's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.