These 4 Measures Indicate That 2G Energy (ETR:2GB) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that 2G Energy AG (ETR:2GB) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for 2G Energy

What Is 2G Energy's Debt?

The image below, which you can click on for greater detail, shows that 2G Energy had debt of €9.63m at the end of June 2024, a reduction from €10.6m over a year. But it also has €11.1m in cash to offset that, meaning it has €1.45m net cash.

How Strong Is 2G Energy's Balance Sheet?

The latest balance sheet data shows that 2G Energy had liabilities of €78.7m due within a year, and liabilities of €30.2m falling due after that. Offsetting these obligations, it had cash of €11.1m as well as receivables valued at €50.8m due within 12 months. So it has liabilities totalling €47.1m more than its cash and near-term receivables, combined.

Of course, 2G Energy has a market capitalization of €337.3m, so these liabilities are probably manageable. 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, 2G Energy also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that 2G Energy grew its EBIT by 18% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if 2G Energy 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 2G Energy 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. Over the last three years, 2G Energy barely recorded positive free cash flow, in total. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

While 2G Energy does have more liabilities than liquid assets, it also has net cash of €1.45m. And it impressed us with its EBIT growth of 18% over the last year. So we don't have any problem with 2G Energy's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in 2G Energy, you may well want to click here to check an interactive graph of its earnings per share history.

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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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.