We Think 2G Energy (ETR:2GB) Can Stay On Top Of Its 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, 2G Energy AG (ETR:2GB) does carry debt. But should shareholders be worried about its use of debt?

We check all companies for important risks. See what we found for 2G Energy in our free report.

Why Does Debt Bring Risk?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does 2G Energy Carry?

You can click the graphic below for the historical numbers, but it shows that 2G Energy had €6.90m of debt in December 2024, down from €8.31m, one year before. However, its balance sheet shows it holds €50.0m in cash, so it actually has €43.1m net cash.

A Look At 2G Energy's Liabilities

We can see from the most recent balance sheet that 2G Energy had liabilities of €103.9m falling due within a year, and liabilities of €28.4m due beyond that. Offsetting these obligations, it had cash of €50.0m as well as receivables valued at €69.3m due within 12 months. So its liabilities total €13.1m more than the combination of its cash and short-term receivables.

Since publicly traded 2G Energy shares are worth a total of €517.6m, it seems unlikely that this level of liabilities would be a major threat. 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, 2G Energy also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for 2G Energy

Also good is that 2G Energy grew its EBIT at 17% over the last year, further increasing its ability to manage debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 2G Energy 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. Looking at the most recent three years, 2G Energy recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about 2G Energy's liabilities, but we can be reassured by the fact it has has net cash of €43.1m. And we liked the look of last year's 17% year-on-year EBIT growth. So is 2G Energy's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of 2G Energy's earnings per share history for free.

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.