Health Check: How Prudently Does Warimpex Finanz- und Beteiligungs (VIE:WXF) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Warimpex Finanz- und Beteiligungs AG (VIE:WXF) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Warimpex Finanz- und Beteiligungs

What Is Warimpex Finanz- und Beteiligungs's Net Debt?

The chart below, which you can click on for greater detail, shows that Warimpex Finanz- und Beteiligungs had €170.5m in debt in September 2020; about the same as the year before. However, because it has a cash reserve of €7.14m, its net debt is less, at about €163.3m.

A Look At Warimpex Finanz- und Beteiligungs' Liabilities

According to the last reported balance sheet, Warimpex Finanz- und Beteiligungs had liabilities of €27.1m due within 12 months, and liabilities of €176.9m due beyond 12 months. Offsetting these obligations, it had cash of €7.14m as well as receivables valued at €2.34m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €194.5m.

This deficit casts a shadow over the €58.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Warimpex Finanz- und Beteiligungs would likely require a major re-capitalisation if it had to pay its creditors today. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Warimpex Finanz- und Beteiligungs had a loss before interest and tax, and actually shrunk its revenue by 51%, to €29m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Warimpex Finanz- und Beteiligungs's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €24m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through €3.7m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Warimpex Finanz- und Beteiligungs (of which 2 are concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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