Is GEA Group (ETR:G1A) Using Too Much 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.' 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. As with many other companies GEA Group Aktiengesellschaft (ETR:G1A) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for GEA Group

What Is GEA Group's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 GEA Group had debt of €419.6m, up from €326.1m in one year. But on the other hand it also has €866.5m in cash, leading to a €446.9m net cash position.

How Strong Is GEA Group's Balance Sheet?

According to the last reported balance sheet, GEA Group had liabilities of €2.13b due within 12 months, and liabilities of €1.64b due beyond 12 months. Offsetting this, it had €866.5m in cash and €1.21b in receivables that were due within 12 months. So it has liabilities totalling €1.69b more than its cash and near-term receivables, combined.

GEA Group has a market capitalization of €6.34b, so it could very likely raise cash to ameliorate 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. Despite its noteworthy liabilities, GEA Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, GEA Group grew its EBIT by 94% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine GEA Group's ability to maintain a healthy balance sheet going forward. 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. Happily for any shareholders, GEA Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although GEA Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €446.9m. And it impressed us with free cash flow of €618m, being 202% of its EBIT. So is GEA Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that GEA Group is showing 1 warning sign in our investment analysis , you should know about...

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. 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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