These 4 measures indicate that Dassault Systèmes (EPA: DSY) is using its debt safely

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. Above all, Dassault Systèmes SE (EPA: DSY) carries the debt. But should shareholders be concerned about its use of debt?

When is debt dangerous?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest analysis for Dassault Systèmes

What is Dassault Systèmes’ net debt?

As you can see below, Dassault Systèmes had € 3.87 billion in debt in September 2021, up from € 4.59 billion the year before. However, it has € 2.67 billion in cash offsetting this, leading to net debt of around € 1.19 billion.

ENXTPA: DSY History of debt to equity January 4, 2022

A look at the liabilities of Dassault Systèmes

Zooming in on the latest balance sheet data, we can see that Dassault Systèmes had a liability of 2.88 billion euros at 12 months and a liability of 4.53 billion euros beyond. On the other hand, it had cash of € 2.67 billion and € 996.9 million in receivables within one year. Its liabilities thus exceed the sum of its cash and its receivables (short term) by 3.74 billion euros.

Of course, Dassault Systèmes has a titanic market cap of € 66.8 billion, so this liability is likely manageable. Having said that, it is clear that we must continue to monitor his record lest it get worse.

We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (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).

Dassault Systèmes’ net debt is only 0.98 times its EBITDA. And its EBIT easily covers its interest costs, being 61.4 times higher. So we’re pretty relaxed about its ultra-conservative use of debt. In addition, Dassault Systèmes has increased its EBIT by 47% over the past twelve months, and this growth will make it easier to process its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Dassault Systèmes’ ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

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. Fortunately for all shareholders, Dassault Systèmes has actually generated more free cash flow than EBIT over the past three years. This kind of cash conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.

Our point of view

The good news is that Dassault Systèmes’ demonstrated ability to cover interest costs with EBIT delights us like a fluffy puppy does a toddler. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! It seems that Dassault Systèmes has no trouble standing on its own, and it has no reason to fear its lenders. In our opinion, he has a healthy and happy track record. Over time, stock prices tend to follow earnings per share, so if you’re interested in Dassault Systèmes, you can click here to view an interactive graph of its historical earnings per share.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 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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