Derichebourg (EPA: DBG) seems to use debt sparingly

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We notice that Derichebourg SA (EPA: DBG) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

Why Does Debt Bring Risk?

Debts 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. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first look at cash and debt levels, together.

Check out our latest analysis for Derichebourg

What is Derichebourg’s debt?

The image below, which you can click for more details, shows that in September 2021 Derichebourg had a debt of € 765.9m, compared to € 511.9m in one year. But it also has € 787.5million in cash to make up for that, which means it has 21.6million euros in net cash.

Is Derichebourg’s balance sheet healthy?

Zooming in on the latest balance sheet data, we see that Derichebourg had a liability of € 820.3 million maturing 12 months and a liability of € 941.9 million maturing thereafter. On the other hand, it had cash of € 787.5 million and € 468.1 million in receivables within one year. Its liabilities thus exceed the sum of its cash and its receivables (short term) by € 506.6 million.

This deficit is not that serious as Derichebourg is worth 1.74 billion euros, and could therefore probably raise enough capital to consolidate its balance sheet, if necessary. However, it is always worth taking a close look at your ability to repay your debt. Despite her significant liabilities, Derichebourg has a net cash flow, so it is fair to say that she does not have significant debt!

Best of all, Derichebourg increased its EBIT by 339% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in the years to come. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Derichebourg’s ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. Derichebourg may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its profitability. ability to manage debt. Over the past three years, Derichebourg has indeed generated more free cash flow than EBIT. This kind of cash conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.

In summary

Although Derichebourg’s balance sheet is not particularly strong, due to total liabilities it is clearly positive to see that it has net cash of € 21.6m. The icing on the cake is that he converted 105% of that EBIT into free cash flow, bringing in 257 million euros. So is Derichebourg’s debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. Note that Derichebourg shows 1 warning sign in our investment analysis , you must know…

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.