These 4 Measures Indicate That Schoeller-Bleckmann Oilfield Equipment (VIE:SBO) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Schoeller-Bleckmann Oilfield Equipment Aktiengesellschaft (VIE:SBO) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Schoeller-Bleckmann Oilfield Equipment

How Much Debt Does Schoeller-Bleckmann Oilfield Equipment Carry?

The image below, which you can click on for greater detail, shows that Schoeller-Bleckmann Oilfield Equipment had debt of €257.9m at the end of September 2022, a reduction from €287.4m over a year. However, it does have €295.7m in cash offsetting this, leading to net cash of €37.8m.

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

The latest balance sheet data shows that Schoeller-Bleckmann Oilfield Equipment had liabilities of €305.9m due within a year, and liabilities of €189.6m falling due after that. Offsetting these obligations, it had cash of €295.7m as well as receivables valued at €151.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €48.7m.

Of course, Schoeller-Bleckmann Oilfield Equipment has a market capitalization of €1.02b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

Better yet, Schoeller-Bleckmann Oilfield Equipment grew its EBIT by 252% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Schoeller-Bleckmann Oilfield Equipment can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Schoeller-Bleckmann Oilfield Equipment has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last two years, Schoeller-Bleckmann Oilfield Equipment created free cash flow amounting to 18% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

We could understand if investors are concerned about Schoeller-Bleckmann Oilfield Equipment's liabilities, but we can be reassured by the fact it has has net cash of €37.8m. And it impressed us with its EBIT growth of 252% over the last year. So is Schoeller-Bleckmann Oilfield Equipment's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Schoeller-Bleckmann Oilfield Equipment .

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.