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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies DiaSorin S.p.A. (BIT:DIA) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
What Is DiaSorin's Debt?
The image below, which you can click on for greater detail, shows that at June 2021 DiaSorin had debt of €432.7m, up from €8.0k in one year. But it also has €896.8m in cash to offset that, meaning it has €464.2m net cash.
How Healthy Is DiaSorin's Balance Sheet?
According to the last reported balance sheet, DiaSorin had liabilities of €154.6m due within 12 months, and liabilities of €567.7m due beyond 12 months. On the other hand, it had cash of €896.8m and €180.9m worth of receivables due within a year. So it actually has €355.5m more liquid assets than total liabilities.
This surplus suggests that DiaSorin has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, DiaSorin boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that DiaSorin has boosted its EBIT by 74%, thus reducing the spectre of future debt repayments. 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 DiaSorin'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. DiaSorin 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 most recent three years, DiaSorin recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While we empathize with investors who find debt concerning, you should keep in mind that DiaSorin has net cash of €464.2m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 74% over the last year. So we don't think DiaSorin's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that DiaSorin is showing 1 warning sign in our investment analysis , you should know about...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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