Does Dufry (VTX: DUFN) use debt in a risky way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Dufry SA (VTX: DUFN) uses debt. But the real question is whether this debt makes the business risky.

What risk does debt entail?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

Discover our latest analysis for Dufry

How much debt does Dufry have?

You can click on the graph below for historical figures, but it shows that Dufry had a debt of 3.99 billion francs in June 2021, up from 4.40 billion francs a year earlier. However, he also had 641.4 million Swiss francs in cash, so his net debt is 3.35 billion Swiss francs.

SWX: DUFN History of debt to equity November 27, 2021

Is Dufry’s record healthy?

We can see from the most recent balance sheet that Dufry had liabilities of 2.43 billion francs maturing within one year and liabilities of 7.43 billion francs beyond. In compensation for these obligations, he had cash of CHF 641.4 million as well as receivables valued at CHF 487.8 million within 12 months. Its liabilities are therefore 8.73 billion francs more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the 3.82 billion franc company, like a colossus dominating ordinary mortals. We therefore believe that shareholders should watch it closely. After all, Dufry would likely need a major recapitalization if he were to pay his creditors today. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Dufry 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.

Over 12 months, Dufry recorded a loss in EBIT and saw its turnover fall to CHF 2.2 billion, a decrease of 65%. It makes us nervous, to say the least.

Emptor Warning

Not only has Dufry’s turnover declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Indeed, it lost 1.4 billion CHF very considerable in terms of EBIT. Considering that aside from the liabilities mentioned above, we are nervous about the business. We would like to see big improvements in the short term before we get too interested in the title. Notably because it has had negative free cash flow of CHF 146 million over the past twelve months. Suffice it to say, then, that we consider the stock to be risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 2 warning signs we spotted with Dufry.

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

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 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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Julio V. Miller