David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Designer Brands Inc. (NYSE: DBI) is in debt. But should shareholders be concerned about its use of debt?
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. If things really go wrong, lenders can take over the business. 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. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a business’s debt levels is to consider its cash flow and debt together.
Check out our latest review for designer brands
How much debt do designer brands carry?
You can click on the graph below for the historical numbers, but it shows that Designer Brands was in debt of $ 247.1 million in July 2021, down from $ 393.0 million a year earlier. However, given that it has a cash reserve of US $ 46.5 million, its net debt is less, at around US $ 200.6 million.
How strong are designer brands’ balance sheets?
Zooming in on the latest balance sheet data, we can see that Designer Brands had a liability of US $ 774.7 million due within 12 months and a liability of US $ 860.2 million beyond. On the other hand, it had US $ 46.5 million in cash and US $ 199.4 million in receivables due within one year. It therefore has liabilities totaling US $ 1.39 billion more than its cash and short-term receivables combined.
When you consider that this deficit exceeds the company’s US $ 1.13 billion market cap, you may well be inclined to take a close look at the balance sheet. In the event that the company were to clean up its balance sheet quickly, it seems likely that shareholders would suffer significant dilution. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Designer Brands’ ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Designer Brands’ revenue was fairly stable over the past year and generated negative EBIT. While that doesn’t impress much, it’s not too bad either.
Importantly, Designer Brands has recorded a loss of earnings before interest and taxes (EBIT) over the past year. Indeed, it lost 33 million US dollars in EBIT. Considering that aside from the liabilities mentioned above, we are nervous about the business. It would have to improve its operation quickly for us to take an interest in it. Notably because he had negative free cash flow of US $ 107,000 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 place to start. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that Designer Brands shows 1 warning sign in our investment analysis , you must know…
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.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
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.