Warimpex Finanz- und Beteiligungs (VIE:WXF) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Warimpex Finanz- und Beteiligungs AG (VIE:WXF) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Warimpex Finanz- und Beteiligungs

How Much Debt Does Warimpex Finanz- und Beteiligungs Carry?

As you can see below, Warimpex Finanz- und Beteiligungs had €163.7m of debt, at March 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had €6.84m in cash, and so its net debt is €156.9m.

How Healthy Is Warimpex Finanz- und Beteiligungs's Balance Sheet?

The latest balance sheet data shows that Warimpex Finanz- und Beteiligungs had liabilities of €31.6m due within a year, and liabilities of €169.4m falling due after that. Offsetting these obligations, it had cash of €6.84m as well as receivables valued at €4.08m due within 12 months. So it has liabilities totalling €190.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €66.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Warimpex Finanz- und Beteiligungs would probably need a major re-capitalization if its creditors were to demand repayment.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With a net debt to EBITDA ratio of 6.9, it's fair to say Warimpex Finanz- und Beteiligungs does have a significant amount of debt. But the good news is that it boasts fairly comforting interest cover of 3.3 times, suggesting it can responsibly service its obligations. However, it should be some comfort for shareholders to recall that Warimpex Finanz- und Beteiligungs actually grew its EBIT by a hefty 116%, over the last 12 months. If that earnings trend continues it will make its debt load much more manageable in the future. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Warimpex Finanz- und Beteiligungs's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Considering the last three years, Warimpex Finanz- und Beteiligungs actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

To be frank both Warimpex Finanz- und Beteiligungs's net debt to EBITDA and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at growing its EBIT; that's encouraging. Overall, it seems to us that Warimpex Finanz- und Beteiligungs's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Warimpex Finanz- und Beteiligungs has 5 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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