Here's Why CEWE Stiftung KGaA (ETR:CWC) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, CEWE Stiftung & Co. KGaA (ETR:CWC) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for CEWE Stiftung KGaA

What Is CEWE Stiftung KGaA's Net Debt?

You can click the graphic below for the historical numbers, but it shows that CEWE Stiftung KGaA had €18.5m of debt in September 2020, down from €59.3m, one year before. However, it does have €20.7m in cash offsetting this, leading to net cash of €2.20m.

How Healthy Is CEWE Stiftung KGaA's Balance Sheet?

The latest balance sheet data shows that CEWE Stiftung KGaA had liabilities of €138.9m due within a year, and liabilities of €92.4m falling due after that. On the other hand, it had cash of €20.7m and €55.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €155.1m.

This deficit isn't so bad because CEWE Stiftung KGaA is worth €665.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

Fortunately, CEWE Stiftung KGaA grew its EBIT by 9.5% in the last year, making that debt load look even more manageable. 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 CEWE Stiftung KGaA's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While CEWE Stiftung KGaA has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, CEWE Stiftung KGaA generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While CEWE Stiftung KGaA does have more liabilities than liquid assets, it also has net cash of €2.20m. And it impressed us with free cash flow of €76m, being 88% of its EBIT. So is CEWE Stiftung KGaA's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in CEWE Stiftung KGaA, you may well want to click here to check an interactive graph of its earnings per share history.

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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