Warren Buffett said: “Volatility is far from synonymous with risk”. 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. Like many other companies Datalogic SpA (BIT: DAL) uses debt. But does this debt worry shareholders?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

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What is Datalogic’s debt?

You can click on the graph below for the historical figures, but it shows that Datalogic had 135.4 million euros in debt in March 2021, up from 160.7 million euros a year earlier. However, it has € 112.0 million in cash offsetting this, which leads to net debt of around € 23.5 million.

A look at Datalogic’s responsibilities

Zooming in on the latest balance sheet data, we can see that Datalogic had a liability of 225.6 million euros due within 12 months and a liability of 130.0 million euros due beyond. On the other hand, it had cash of € 112.0 million and € 111.8 million in receivables within one year. Its liabilities therefore amount to € 131.7 million more than the combination of its cash and short-term receivables.

Given that listed Datalogic shares are worth a total of 1.23 billion euros, it seems unlikely that this level of liabilities is a major threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

Datalogic’s net debt is only 0.37 times its EBITDA. And its EBIT easily covers its interest costs, being 27.5 times higher. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. But the bad news is that Datalogic has seen its EBIT drop 12% over the past twelve months. We believe that this type of performance, if repeated frequently, could well cause difficulties for the title. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Datalogic 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 needs free cash flow to pay off debts; accounting profits are not enough. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Datalogic has generated strong free cash flow equivalent to 54% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.

Our point of view

Datalogic’s ability to cover its interest costs with its EBIT and its net debt to EBITDA has reinforced our ability to manage its debt. But truth be told, its EBIT growth rate has made our nails bite our nails. When we consider all the elements mentioned above, it seems to us that Datalogic is managing its debt quite well. That said, the load is heavy enough that we recommend that any shareholder watch it closely. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Note that Datalogic displays 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-flow-growing stocks today.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares 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.
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