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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that DNXCorp SE (EPA:DNX) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for DNXCorp
How Much Debt Does DNXCorp Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 DNXCorp had €69.3k of debt, an increase on €19.0k, over one year. But it also has €9.86m in cash to offset that, meaning it has €9.79m net cash.
How Healthy Is DNXCorp's Balance Sheet?
According to the balance sheet data, DNXCorp had liabilities of €10.8m due within 12 months, but no longer term liabilities. Offsetting this, it had €9.86m in cash and €7.28m in receivables that were due within 12 months. So it can boast €6.33m more liquid assets than total liabilities.
This excess liquidity is a great indication that DNXCorp's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, DNXCorp boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact DNXCorp's saving grace is its low debt levels, because its EBIT has tanked 25% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since DNXCorp will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.