Domain Holdings Australia (ASX:DHG) appears to be using debt sparingly

Warren Buffett said: “Volatility is far from synonymous with risk. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that Domain Holdings Australia Limited (ASX:DHG) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force 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 has is to look at its cash and debt together.

See our latest analysis for Domain Holdings Australia

How much debt does Domain Holdings Australia have?

As you can see below, at the end of June 2022, Domain Holdings Australia had A$218.6 million in debt, up from A$173.1 million a year ago. Click on the image for more details. On the other hand, he has A$67.1 million in cash, resulting in a net debt of around A$151.5 million.

ASX: History of Debt to Equity DHG September 3, 2022

How healthy is Domain Holdings Australia’s balance sheet?

We can see from the most recent balance sheet that Domain Holdings Australia had liabilities of AU$92.9 million maturing within a year, and liabilities of AU$321.5 million due beyond . As compensation for these obligations, it had cash of A$67.1 million and receivables valued at A$60.0 million due within 12 months. It therefore has liabilities totaling A$287.3 million more than its cash and short-term receivables, combined.

Given that publicly traded shares of Domain Holdings Australia are worth a total of A$2.16 billion, it seems unlikely that this level of liability is a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

We would say that Domain Holdings Australia’s moderate net debt to EBITDA ratio (2.0) indicates prudence in leverage. And its towering EBIT of 12.2 times its interest expense means that the debt burden is as light as a peacock feather. It is also relevant to note that Domain Holdings Australia has increased its EBIT by a very respectable 27% over the past year, improving its ability to repay debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Domain Holdings Australia’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a company can only repay its debts with cold hard cash, not with book profits. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Domain Holdings Australia has recorded free cash flow of 90% of its EBIT, which is higher than we would normally expect. This positions him well to pay off debt if desired.

Our point of view

Domain Holdings Australia’s interest coverage suggests it can manage its debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And this is only the beginning of good news since its conversion of EBIT into free cash flow is also very pleasing. Overall, we don’t think Domain Holdings Australia is taking bad risks, as its leverage looks modest. The balance sheet therefore seems rather healthy to us. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that Domain Holdings Australia displays 1 warning sign in our investment analysis you should know…

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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