Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Frauenthal Holding AG (VIE:FKA) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Frauenthal Holding Carry?
The image below, which you can click on for greater detail, shows that Frauenthal Holding had debt of €80.1m at the end of December 2020, a reduction from €95.9m over a year. However, it does have €67.1m in cash offsetting this, leading to net debt of about €13.0m.
How Healthy Is Frauenthal Holding's Balance Sheet?
According to the last reported balance sheet, Frauenthal Holding had liabilities of €168.1m due within 12 months, and liabilities of €158.5m due beyond 12 months. Offsetting this, it had €67.1m in cash and €24.7m in receivables that were due within 12 months. So its liabilities total €234.8m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the €154.9m 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, Frauenthal Holding would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Frauenthal Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Frauenthal Holding had a loss before interest and tax, and actually shrunk its revenue by 8.1%, to €874m. We would much prefer see growth.
Importantly, Frauenthal Holding had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €7.2m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of €15m. In the meantime, we consider the stock to be risky. 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. Case in point: We've spotted 2 warning signs for Frauenthal Holding you should be aware of, and 1 of them is potentially serious.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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