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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Encres Dubuit (EPA:ALDUB) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Encres Dubuit
How Much Debt Does Encres Dubuit Carry?
As you can see below, Encres Dubuit had €340.0k of debt at December 2018, down from €439.0k a year prior. However, it does have €7.47m in cash offsetting this, leading to net cash of €7.13m.
How Healthy Is Encres Dubuit's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Encres Dubuit had liabilities of €4.58m due within 12 months and liabilities of €1.57m due beyond that. On the other hand, it had cash of €7.47m and €5.76m worth of receivables due within a year. So it can boast €7.08m more liquid assets than total liabilities.
This excess liquidity is a great indication that Encres Dubuit'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. Simply put, the fact that Encres Dubuit has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for Encres Dubuit if management cannot prevent a repeat of the 22% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Encres Dubuit can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.