3U Holding (ETR:UUU) Has A Somewhat Strained Balance Sheet

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 3U Holding AG (ETR:UUU) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for 3U Holding

What Is 3U Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that 3U Holding had €19.7m of debt in September 2020, down from €20.6m, one year before. But it also has €20.6m in cash to offset that, meaning it has €940.0k net cash.

How Healthy Is 3U Holding's Balance Sheet?

According to the last reported balance sheet, 3U Holding had liabilities of €12.6m due within 12 months, and liabilities of €25.3m due beyond 12 months. Offsetting this, it had €20.6m in cash and €4.70m in receivables that were due within 12 months. So it has liabilities totalling €12.6m more than its cash and near-term receivables, combined.

Given 3U Holding has a market capitalization of €81.2m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, 3U Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, 3U Holding made a loss at the EBIT level, last year, but improved that to positive EBIT of €466k in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if 3U Holding 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. 3U Holding 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. Over the last year, 3U Holding saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While 3U Holding does have more liabilities than liquid assets, it also has net cash of €940.0k. So although we see some areas for improvement, we're not too worried about 3U Holding's balance sheet. 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. To that end, you should be aware of the 4 warning signs we've spotted with 3U Holding .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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