FRIWO (ETR:CEA) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, FRIWO AG (ETR:CEA) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for FRIWO

What Is FRIWO's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 FRIWO had €26.8m of debt, an increase on €23.5m, over one year. However, because it has a cash reserve of €4.44m, its net debt is less, at about €22.4m.

How Healthy Is FRIWO's Balance Sheet?

According to the last reported balance sheet, FRIWO had liabilities of €40.1m due within 12 months, and liabilities of €16.5m due beyond 12 months. On the other hand, it had cash of €4.44m and €15.7m worth of receivables due within a year. So it has liabilities totalling €36.5m more than its cash and near-term receivables, combined.

This deficit isn't so bad because FRIWO is worth €178.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since FRIWO will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, FRIWO reported revenue of €101m, which is a gain of 15%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months FRIWO produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €2.4m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €6.2m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for FRIWO 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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