Here's Why Muehlhan (ETR:M4N) Can Manage Its Debt Responsibly

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.' 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, Muehlhan AG (ETR:M4N) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Muehlhan

What Is Muehlhan's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Muehlhan had €20.7m of debt in December 2021, down from €34.3m, one year before. But it also has €24.7m in cash to offset that, meaning it has €3.99m net cash.

How Healthy Is Muehlhan's Balance Sheet?

According to the last reported balance sheet, Muehlhan had liabilities of €55.8m due within 12 months, and liabilities of €14.8m due beyond 12 months. On the other hand, it had cash of €24.7m and €64.9m worth of receivables due within a year. So it can boast €19.0m more liquid assets than total liabilities.

It's good to see that Muehlhan has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Muehlhan boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Muehlhan is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 410% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Muehlhan'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Muehlhan 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, Muehlhan recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Muehlhan has net cash of €3.99m, as well as more liquid assets than liabilities. And we liked the look of last year's 410% year-on-year EBIT growth. So we don't think Muehlhan's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Muehlhan you should be aware of, and 2 of them shouldn't be ignored.

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.