Does Grammer (ETR:GMM) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Grammer AG (ETR:GMM) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Grammer

What Is Grammer's Net Debt?

As you can see below, at the end of March 2022, Grammer had €457.2m of debt, up from €370.5m a year ago. Click the image for more detail. On the flip side, it has €104.8m in cash leading to net debt of about €352.4m.

How Strong Is Grammer's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Grammer had liabilities of €750.8m due within 12 months and liabilities of €412.3m due beyond that. Offsetting this, it had €104.8m in cash and €314.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €744.2m.

This deficit casts a shadow over the €177.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Grammer 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 Grammer'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 Grammer wasn't profitable at an EBIT level, but managed to grow its revenue by 8.8%, to €1.9b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Grammer had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €611k at the EBIT level. 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. Nevertheless, we would not bet on it given that it vaporized €12m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. For example, we've discovered 2 warning signs for Grammer (1 is significant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.