Dominion Hosting Holding (BIT:DHH) Seems To Use Debt Rather Sparingly

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.' 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. Importantly, Dominion Hosting Holding S.p.A. (BIT:DHH) does carry debt. But the real question is whether this debt is making the company risky.

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Dominion Hosting Holding

How Much Debt Does Dominion Hosting Holding Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Dominion Hosting Holding had €3.22m of debt, an increase on €12.4k, over one year. But on the other hand it also has €9.06m in cash, leading to a €5.83m net cash position.

How Healthy Is Dominion Hosting Holding's Balance Sheet?

The latest balance sheet data shows that Dominion Hosting Holding had liabilities of €7.53m due within a year, and liabilities of €6.83m falling due after that. Offsetting this, it had €9.06m in cash and €2.45m in receivables that were due within 12 months. So it has liabilities totalling €2.86m more than its cash and near-term receivables, combined.

Given Dominion Hosting Holding has a market capitalization of €74.6m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Dominion Hosting Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Dominion Hosting Holding grew its EBIT by 541% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Dominion Hosting Holding'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. Dominion Hosting Holding 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. Happily for any shareholders, Dominion Hosting Holding actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Dominion Hosting Holding's liabilities, but we can be reassured by the fact it has has net cash of €5.83m. And it impressed us with free cash flow of €1.7m, being 147% of its EBIT. So is Dominion Hosting Holding's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Dominion Hosting Holding (of which 1 is concerning!) you should know about.

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. 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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