GEA Group (ETR:G1A) Has A Pretty 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 GEA Group Aktiengesellschaft (ETR:G1A) makes use of debt. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does GEA Group Carry?

As you can see below, GEA Group had €104.2m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has €638.3m in cash to offset that, meaning it has €534.1m net cash.

How Healthy Is GEA Group's Balance Sheet?

According to the last reported balance sheet, GEA Group had liabilities of €2.62b due within 12 months, and liabilities of €988.0m due beyond 12 months. Offsetting these obligations, it had cash of €638.3m as well as receivables valued at €1.26b due within 12 months. So it has liabilities totalling €1.71b more than its cash and near-term receivables, combined.

Since publicly traded GEA Group shares are worth a total of €9.15b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, GEA Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for GEA Group

The good news is that GEA Group has increased its EBIT by 9.7% over twelve months, which should ease any concerns about debt repayment. 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 GEA Group 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. GEA Group 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. During the last three years, GEA Group produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While GEA Group does have more liabilities than liquid assets, it also has net cash of €534.1m. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in €473m. So we don't think GEA Group's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in GEA Group, you may well want to click here to check an interactive graph of its earnings per share history.

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.