Dom Development (WSE:DOM) Could Easily Take On More Debt

By
Simply Wall St
Published
June 01, 2021
WSE:DOM

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. We note that Dom Development S.A. (WSE:DOM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dom Development

How Much Debt Does Dom Development Carry?

As you can see below, Dom Development had zł370.0m of debt at March 2021, down from zł693.4m a year prior. However, its balance sheet shows it holds zł601.5m in cash, so it actually has zł231.5m net cash.

debt-equity-history-analysis
WSE:DOM Debt to Equity History June 2nd 2021

How Strong Is Dom Development's Balance Sheet?

We can see from the most recent balance sheet that Dom Development had liabilities of zł1.35b falling due within a year, and liabilities of zł457.8m due beyond that. Offsetting these obligations, it had cash of zł601.5m as well as receivables valued at zł140.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł1.06b.

This deficit isn't so bad because Dom Development is worth zł3.94b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Dom Development also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Dom Development grew its EBIT by 110% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Dom Development 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 company can only pay off debt with cold hard cash, not accounting profits. While Dom Development 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. During the last three years, Dom Development generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While Dom Development does have more liabilities than liquid assets, it also has net cash of zł231.5m. And it impressed us with free cash flow of zł630m, being 87% of its EBIT. So is Dom Development's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. 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 2 warning signs for Dom Development (of which 1 is potentially serious!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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