Does Develia (WSE:DVL) Have A Healthy Balance Sheet?

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

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Develia

How Much Debt Does Develia Carry?

You can click the graphic below for the historical numbers, but it shows that Develia had zł528.8m of debt in June 2023, down from zł596.6m, one year before. However, it does have zł658.8m in cash offsetting this, leading to net cash of zł130.1m.

How Strong Is Develia's Balance Sheet?

We can see from the most recent balance sheet that Develia had liabilities of zł1.36b falling due within a year, and liabilities of zł368.7m due beyond that. Offsetting this, it had zł658.8m in cash and zł92.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł981.3m.

This deficit isn't so bad because Develia is worth zł2.10b, 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, Develia also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Develia grew its EBIT by 109% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Develia'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Develia 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. In the last three years, Develia's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although Develia's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł130.1m. And we liked the look of last year's 109% year-on-year EBIT growth. So we are not troubled with Develia's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Develia has 2 warning signs (and 1 which is significant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.