These 4 Measures Indicate That Digital Bros (BIT:DIB) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Digital Bros S.p.A. (BIT:DIB) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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.

View our latest analysis for Digital Bros

What Is Digital Bros's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Digital Bros had €30.2m of debt, an increase on €15.4m, over one year. But on the other hand it also has €43.6m in cash, leading to a €13.5m net cash position.

How Healthy Is Digital Bros' Balance Sheet?

According to the last reported balance sheet, Digital Bros had liabilities of €73.8m due within 12 months, and liabilities of €26.9m due beyond 12 months. Offsetting this, it had €43.6m in cash and €35.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €21.3m.

Since publicly traded Digital Bros shares are worth a total of €383.0m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Digital Bros boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Digital Bros saw its EBIT decline by 3.7% over the last year. 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 it is future earnings, more than anything, that will determine Digital Bros'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Digital Bros has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Digital Bros 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Digital Bros has €13.5m in net cash. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in €29m. So we don't think Digital Bros's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Digital Bros you should know about.

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.