Health Check: How Prudently Does DBA Group (BIT:DBA) Use Debt?

Warren Buffett famously said, '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 DBA Group S.p.A. (BIT:DBA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for DBA Group

What Is DBA Group's Net Debt?

As you can see below, DBA Group had €16.1m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has €2.61m in cash leading to net debt of about €13.5m.

A Look At DBA Group's Liabilities

The latest balance sheet data shows that DBA Group had liabilities of €24.2m due within a year, and liabilities of €11.0m falling due after that. Offsetting these obligations, it had cash of €2.61m as well as receivables valued at €23.4m due within 12 months. So it has liabilities totalling €9.21m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €8.56m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine DBA Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year DBA Group wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to €66m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate DBA Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable €1.4m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of €3.2m. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - DBA Group has 2 warning signs we think you should be aware of.

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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