Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, DIC Asset SA (ETR:DIC) is in debt. But the more important question is: what risk does this debt create?
When is debt dangerous?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for DIC Asset
What is DIC Asset’s net debt?
You can click on the chart below for historical numbers, but it shows that in March 2022, DIC Asset had €2.45 billion in debt, an increase from €1.58 billion, on a year. However, he has €452.3m in cash that offsets this, resulting in a net debt of around €2.00bn.
How healthy is DIC Asset’s balance sheet?
According to the last published balance sheet, DIC Asset had liabilities of 497.7 million euros maturing within 12 months and liabilities of 2.20 billion euros maturing beyond 12 months. In return, it had 452.3 million euros in cash and 361.4 million euros in receivables due within 12 months. Thus, its liabilities total 1.89 billion euros more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the 946.3 million euro company, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. Ultimately, DIC Asset would likely need a major recapitalization if its creditors were to demand repayment.
We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). Thus, we consider debt to earnings with and without depreciation and amortization charges.
DIC Asset shareholders face the double whammy of a high net debt to EBITDA ratio (14.7) and fairly low interest coverage, as EBIT is only 1.8 times the charge of interests. This means that we would consider him to be heavily indebted. However, a redeeming factor is that DIC Asset has increased its EBIT by 10% over the past 12 months, strengthening its ability to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine DIC Asset’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, DIC Asset has recorded free cash flow of 71% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.
Our point of view
At first glance, DIC Asset’s net debt to EBITDA left us hesitant about the stock, and its level of total liabilities was no more appealing than the single empty restaurant on the busiest night of the year. . But at least it’s decent enough to convert EBIT to free cash flow; it’s encouraging. Overall, we think it’s fair to say that DIC Asset is sufficiently leveraged that there are real risks around the balance sheet. If all goes well, this should boost returns, but on the other hand, the risk of permanent capital loss is increased by debt. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 5 warning signs for DIC Asset (including 2 a little unpleasant!) to know.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.