Yahoo Finance Health Check: How Prudently Does Directa Plus (LON:DCTA) Use Debt?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Directa Plus Plc (LON:DCTA) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.
See our latest analysis for Directa Plus
What Is Directa Plus's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2021 Directa Plus had debt of €1.92m, up from €1.13m in one year. But it also has €5.19m in cash to offset that, meaning it has €3.27m net cash.
How Healthy Is Directa Plus' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Directa Plus had liabilities of €2.27m due within 12 months and liabilities of €3.01m due beyond that. Offsetting these obligations, it had cash of €5.19m as well as receivables valued at €2.62m due within 12 months. So it can boast €2.54m more liquid assets than total liabilities.
This short term liquidity is a sign that Directa Plus could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Directa Plus boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Directa Plus's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Directa Plus wasn't profitable at an EBIT level, but managed to grow its revenue by 67%, to €7.6m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Directa Plus?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Directa Plus had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €3.3m of cash and made a loss of €3.4m. But the saving grace is the €3.27m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Directa Plus's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Directa Plus's profit, revenue, and operating cashflow have changed over the last few years.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
