Is Diebold Nixdorf (NYSE:DBD) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Diebold Nixdorf, Incorporated (NYSE:DBD) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Diebold Nixdorf

What Is Diebold Nixdorf's Net Debt?

The image below, which you can click on for greater detail, shows that Diebold Nixdorf had debt of US$1.25b at the end of December 2023, a reduction from US$2.60b over a year. However, it also had US$563.6m in cash, and so its net debt is US$685.5m.

How Strong Is Diebold Nixdorf's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Diebold Nixdorf had liabilities of US$1.42b due within 12 months and liabilities of US$1.66b due beyond that. Offsetting this, it had US$563.6m in cash and US$721.8m in receivables that were due within 12 months. So its liabilities total US$1.80b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$1.18b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Diebold Nixdorf would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While Diebold Nixdorf has a quite reasonable net debt to EBITDA multiple of 2.5, its interest cover seems weak, at 0.65. This does suggest the company is paying fairly high interest rates. Either way there's no doubt the stock is using meaningful leverage. Pleasingly, Diebold Nixdorf is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 688% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Diebold Nixdorf'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. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Diebold Nixdorf saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Diebold Nixdorf's interest cover left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at growing its EBIT; that's encouraging. We're quite clear that we consider Diebold Nixdorf to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. 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. To that end, you should be aware of the 3 warning signs we've spotted with Diebold Nixdorf .

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.