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 risk.” So it seems like smart money knows that debt – which is usually linked to bankruptcies – is a very important factor when you assess the risk of a business. We notice that Dassault Aviation SA (EPA: AM) has debt on its balance sheet. But does this debt worry shareholders?
Why is debt risky?
Debt and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. 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. When we think of a business’s use of debt, we first look at cash flow and debt together.
Discover our latest analyzes for Dassault Aviation
What is Dassault Aviation’s net debt?
As you can see below, Dassault Aviation had € 123.0m in debt in December 2020, up from € 380.9m a year earlier. But he also has 3.56 billion euros in cash to make up for that, which means he has 3.44 billion euros in net cash.
A look at the responsibilities of Dassault Aviation
Zooming in on the latest balance sheet data, we see that Dassault Aviation had a liability of 8.93 billion euros within 12 months and a liability of 226.4 million euros beyond. In return for these obligations, it has cash of € 3.56 billion as well as receivables valued at € 1.18 billion within 12 months. It therefore has liabilities of 4.40 billion euros more than its cash and short-term receivables combined.
Dassault Aviation has a very strong market capitalization of 8.57 billion euros, so it could very likely raise cash to improve its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay your debt. Despite its notable commitments, Dassault Aviation has a net cash flow, so it is fair to say that it does not have a heavy debt!
It’s also good that Dassault Aviation’s load is not too heavy, as its EBIT is down 63% compared to last year. When it comes to paying down debt, lower income is no more helpful to your health than sugary sodas. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Dassault Aviation can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only pay off its debts with cash, not book profits. While Dassault Aviation has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erodes) that cash. balanced. Over the past three years, Dassault Aviation has recorded negative free cash flow, in total. Debt is typically more expensive and almost always riskier in the hands of a business with negative free cash flow. Shareholders should hope for improvement.
While Dassault Aviation has more liabilities than liquid assets, it also has net cash of € 3.44 billion. Despite its cash flow, we believe Dassault Aviation seems to be struggling to grow its EBIT, so we are wary of the stock. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 1 warning sign for Dassault Aviation you have to be aware of it.
Of course, if you are the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash net growth stocks, today.
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