Dom Development (WSE:DOM) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Dom Development S.A. (WSE:DOM) 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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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

What Is Dom Development's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Dom Development had zł312.3m of debt in March 2023, down from zł377.5m, one year before. However, its balance sheet shows it holds zł393.8m in cash, so it actually has zł81.5m net cash.

How Healthy Is Dom Development's Balance Sheet?

According to the last reported balance sheet, Dom Development had liabilities of zł2.02b due within 12 months, and liabilities of zł450.1m due beyond 12 months. Offsetting this, it had zł393.8m in cash and zł77.4m in receivables that were due within 12 months. So it has liabilities totalling zł2.00b more than its cash and near-term receivables, combined.

Dom Development has a market capitalization of zł3.57b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

In addition to that, we're happy to report that Dom Development has boosted its EBIT by 43%, 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Dom Development 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. During the last three years, Dom Development generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Dom Development's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł81.5m. And it impressed us with free cash flow of zł275m, being 88% of its EBIT. So is Dom Development's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 2 warning signs for Dom Development (1 is significant) 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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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.