Is Schoeller-Bleckmann Oilfield Equipment (VIE:SBO) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Schoeller-Bleckmann Oilfield Equipment Aktiengesellschaft (VIE:SBO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Schoeller-Bleckmann Oilfield Equipment

What Is Schoeller-Bleckmann Oilfield Equipment's Debt?

You can click the graphic below for the historical numbers, but it shows that Schoeller-Bleckmann Oilfield Equipment had €287.4m of debt in September 2021, down from €311.4m, one year before. However, its balance sheet shows it holds €296.1m in cash, so it actually has €8.68m net cash.

How Healthy Is Schoeller-Bleckmann Oilfield Equipment's Balance Sheet?

According to the last reported balance sheet, Schoeller-Bleckmann Oilfield Equipment had liabilities of €217.1m due within 12 months, and liabilities of €248.4m due beyond 12 months. Offsetting these obligations, it had cash of €296.1m as well as receivables valued at €85.5m due within 12 months. So it has liabilities totalling €83.9m more than its cash and near-term receivables, combined.

Since publicly traded Schoeller-Bleckmann Oilfield Equipment shares are worth a total of €644.9m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Schoeller-Bleckmann Oilfield Equipment also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Schoeller-Bleckmann Oilfield Equipment made a loss at the EBIT level, last year, but improved that to positive EBIT of €15m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Schoeller-Bleckmann Oilfield Equipment'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. Schoeller-Bleckmann Oilfield Equipment may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Schoeller-Bleckmann Oilfield Equipment actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Schoeller-Bleckmann Oilfield Equipment's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €8.68m. And it impressed us with free cash flow of €18m, being 116% of its EBIT. So we are not troubled with Schoeller-Bleckmann Oilfield Equipment's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Schoeller-Bleckmann Oilfield Equipment that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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