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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that DATRON AG (ETR:DAR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for DATRON
What Is DATRON's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 DATRON had €1.00m of debt, an increase on none, over one year. But it also has €8.47m in cash to offset that, meaning it has €7.46m net cash.
How Strong Is DATRON's Balance Sheet?
We can see from the most recent balance sheet that DATRON had liabilities of €5.17m falling due within a year, and liabilities of €2.00m due beyond that. On the other hand, it had cash of €8.47m and €7.96m worth of receivables due within a year. So it actually has €9.25m more liquid assets than total liabilities.
This excess liquidity suggests that DATRON is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, DATRON boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact DATRON's saving grace is its low debt levels, because its EBIT has tanked 22% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine DATRON'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 report on analyst profit forecasts to be interesting.