Is BAUER (ETR:B5A) Using Debt In A Risky Way?

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 BAUER Aktiengesellschaft (ETR:B5A) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for BAUER

How Much Debt Does BAUER Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 BAUER had €620.1m of debt, an increase on €392.5m, over one year. However, it also had €53.4m in cash, and so its net debt is €566.6m.

How Healthy Is BAUER's Balance Sheet?

According to the last reported balance sheet, BAUER had liabilities of €872.1m due within 12 months, and liabilities of €422.4m due beyond 12 months. Offsetting this, it had €53.4m in cash and €453.4m in receivables that were due within 12 months. So its liabilities total €787.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €196.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, BAUER 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 ultimately the future profitability of the business will decide if BAUER 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.

In the last year BAUER had a loss before interest and tax, and actually shrunk its revenue by 14%, to €1.4b. That's not what we would hope to see.

Caveat Emptor

Not only did BAUER's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €12m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost €49m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that BAUER is showing 2 warning signs in our investment analysis , you should know about...

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. 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.
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