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

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.' 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. As with many other companies Schoeller-Bleckmann Oilfield Equipment Aktiengesellschaft (VIE:SBO) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Schoeller-Bleckmann Oilfield Equipment

How Much Debt Does Schoeller-Bleckmann Oilfield Equipment Carry?

The chart below, which you can click on for greater detail, shows that Schoeller-Bleckmann Oilfield Equipment had €254.6m in debt in December 2023; about the same as the year before. However, it does have €162.4m in cash offsetting this, leading to net debt of about €92.3m.

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

Zooming in on the latest balance sheet data, we can see that Schoeller-Bleckmann Oilfield Equipment had liabilities of €190.5m due within 12 months and liabilities of €197.9m due beyond that. Offsetting this, it had €162.4m in cash and €146.0m in receivables that were due within 12 months. So it has liabilities totalling €80.1m more than its cash and near-term receivables, combined.

Since publicly traded Schoeller-Bleckmann Oilfield Equipment shares are worth a total of €620.1m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Schoeller-Bleckmann Oilfield Equipment has a low debt to EBITDA ratio of only 0.68. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. Another good sign is that Schoeller-Bleckmann Oilfield Equipment has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Schoeller-Bleckmann Oilfield Equipment recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

The good news is that Schoeller-Bleckmann Oilfield Equipment's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. When we consider the range of factors above, it looks like Schoeller-Bleckmann Oilfield Equipment is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Schoeller-Bleckmann Oilfield Equipment .

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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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.