CEWE Stiftung KGaA (ETR:CWC) Seems To Use Debt Rather Sparingly

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.' 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 CEWE Stiftung & Co. KGaA (ETR:CWC) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for CEWE Stiftung KGaA

What Is CEWE Stiftung KGaA's Debt?

The image below, which you can click on for greater detail, shows that CEWE Stiftung KGaA had debt of €9.10m at the end of June 2021, a reduction from €13.6m over a year. However, it does have €17.3m in cash offsetting this, leading to net cash of €8.21m.

How Healthy Is CEWE Stiftung KGaA's Balance Sheet?

According to the last reported balance sheet, CEWE Stiftung KGaA had liabilities of €109.1m due within 12 months, and liabilities of €87.1m due beyond 12 months. Offsetting these obligations, it had cash of €17.3m as well as receivables valued at €58.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €120.6m.

Since publicly traded CEWE Stiftung KGaA shares are worth a total of €899.7m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, CEWE Stiftung KGaA also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that CEWE Stiftung KGaA has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CEWE Stiftung KGaA can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. CEWE Stiftung KGaA 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 three years, CEWE Stiftung KGaA recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

Although CEWE Stiftung KGaA's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €8.21m. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in €51m. So is CEWE Stiftung KGaA's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of CEWE Stiftung KGaA's earnings per share history for free.

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.

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.

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