Does Domino's Pizza Enterprises (ASX:DMP) have a lot of debt?

David Eben put it well: “Volatility is not a risk we care about.” Our focus is to avoid permanent loss of capital. ” In other words, money smart people seem to know that debt (usually associated with bankruptcy) is a very important factor when assessing a company's risk. the important thing is, Domino's Pizza Enterprises Limited (ASX:DMP) has debt. But is this debt a concern for shareholders?

Why does debt pose a risk?

Debt and other liabilities become a risk to a company if it cannot easily meet those obligations through free cash flow or by raising capital at an attractive price. In the worst case scenario, a company may go bankrupt if it is unable to pay its creditors. But a more frequent (but still costly) occurrence is when a company must issue stock at a bargain price, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in business, especially in capital-heavy businesses. When we think of a company's use of debt, we first think of cash and debt together.

Check out our latest analysis for Domino's Pizza Enterprises.

How much debt does Domino's Pizza company have?

Click on the image below for more information, but as of December 2023, Domino's Pizza Enterprises had debt of AU$868.9m, up from AU$807.2m in 1 year. You can see. However, it did have AU$117.4m in cash offsetting this, leading to its net debt of approximately AU$751.5m.

Debt capital history analysis
ASX:DMP Debt to Equity Transition April 20, 2024

View Domino's Pizza Enterprises' debt

The most recent balance sheet shows that Domino's Pizza Enterprises had liabilities of AU$604.5m falling due within a year, and liabilities of AU$1.62b falling due beyond that. I understand. Offsetting this, it had cash of AU$117.4m and receivables of AU$197.5m due within 12 months. So it has liabilities of AU$1.91b more than its cash and short-term receivables, combined.

While this may seem like a lot, Domino's Pizza Enterprises has a market capitalization of AU$3.39 billion, so it could potentially strengthen its balance sheet by raising capital if needed. It's not a bad thing. But we always want to be on the lookout for signs that the debt poses too much risk.

To determine how much debt a company has relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA), and its earnings before interest, tax, and amortization (EBIT) divided by its interest expense. (its interest cover). The advantage of this approach is that it takes into account both the absolute amount of debt (net debt to EBITDA) and the actual interest expense associated with that debt (interest cover ratio).

Domino's Pizza Enterprises has a debt-to-EBITDA ratio of 2.8, with its EBIT covering its interest expense 5.6 times. Taken together, this means that while we don't want higher debt levels, we think the current leverage can be managed. Unfortunately, Domino's Pizza Enterprises' EBIT has declined 20% over the last four quarters. If the decline isn't halted, managing debt will be harder than selling broccoli ice cream at a premium. The balance sheet is clearly the area to focus on when analyzing debt. However, it is future earnings, more than anything else, that will determine whether Domino's Pizza Enterprises can maintain a healthy balance sheet going forward. So if you want to see what the experts think, you might find this free report on analyst profit forecasts to be interesting.

But final considerations are also important. This is because companies cannot pay their debts with paper profits. I need cold cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the past three years, Domino's Pizza Enterprises' free cash flow amounted to 48% of its EBIT, which was lower than expected. This weak cash conversion makes dealing with debt even more difficult.

our view

When we think about Domino's Pizza Enterprises' attempts (not) to grow its EBIT, we're certainly not enthusiastic. But at least the conversion of EBIT to free cash flow isn't too bad. Taking all of the above factors into account, it seems like Domino's Pizza Enterprises' debt makes it a bit risky to run. That's not necessarily a bad thing, but I generally feel more comfortable with lower leverage. There's no question that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet, far from it.Case in point: we discovered 4 warning signs for Domino's Pizza Enterprises you should know.

If you're more interested in fast-growing companies with rock-solid balance sheets, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.

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