Does Decora (WSE:DCR) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Decora S.A. (WSE:DCR) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Decora

What Is Decora's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Decora had zł12.6m of debt in September 2020, down from zł31.1m, one year before. However, its balance sheet shows it holds zł15.9m in cash, so it actually has zł3.29m net cash.

How Healthy Is Decora's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Decora had liabilities of zł55.9m due within 12 months and liabilities of zł3.31m due beyond that. Offsetting these obligations, it had cash of zł15.9m as well as receivables valued at zł67.5m due within 12 months. So it can boast zł24.1m more liquid assets than total liabilities.

This surplus suggests that Decora has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Decora 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 Decora has boosted its EBIT by 88%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Decora can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Decora 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, Decora recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Decora has net cash of zł3.29m, as well as more liquid assets than liabilities. And we liked the look of last year's 88% year-on-year EBIT growth. So is Decora'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. Case in point: We've spotted 3 warning signs for Decora you should be aware of, and 1 of them is significant.

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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