We Think InnoTec TSS (FRA:TSS) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that InnoTec TSS AG (FRA:TSS) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for InnoTec TSS

What Is InnoTec TSS's Debt?

As you can see below, at the end of June 2023, InnoTec TSS had €11.6m of debt, up from €8.52m a year ago. Click the image for more detail. However, it does have €21.5m in cash offsetting this, leading to net cash of €9.92m.

A Look At InnoTec TSS' Liabilities

According to the last reported balance sheet, InnoTec TSS had liabilities of €14.7m due within 12 months, and liabilities of €13.3m due beyond 12 months. Offsetting this, it had €21.5m in cash and €11.5m in receivables that were due within 12 months. So it can boast €5.05m more liquid assets than total liabilities.

This surplus suggests that InnoTec TSS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, InnoTec TSS boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, InnoTec TSS's EBIT dived 17%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is InnoTec TSS's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. InnoTec TSS 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 most recent three years, InnoTec TSS recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case InnoTec TSS has €9.92m in net cash and a decent-looking balance sheet. So we are not troubled with InnoTec TSS's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for InnoTec TSS you should know about.

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. 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.