Is Francotyp-Postalia Holding (ETR:FPH) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Francotyp-Postalia Holding AG (ETR:FPH) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Francotyp-Postalia Holding

How Much Debt Does Francotyp-Postalia Holding Carry?

As you can see below, Francotyp-Postalia Holding had €35.7m of debt at September 2023, down from €41.1m a year prior. However, its balance sheet shows it holds €38.3m in cash, so it actually has €2.60m net cash.

How Healthy Is Francotyp-Postalia Holding's Balance Sheet?

The latest balance sheet data shows that Francotyp-Postalia Holding had liabilities of €121.7m due within a year, and liabilities of €28.6m falling due after that. Offsetting this, it had €38.3m in cash and €34.2m in receivables that were due within 12 months. So it has liabilities totalling €77.8m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €44.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Francotyp-Postalia Holding would probably need a major re-capitalization if its creditors were to demand repayment. Given that Francotyp-Postalia Holding has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Also positive, Francotyp-Postalia Holding grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Francotyp-Postalia Holding'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. Francotyp-Postalia 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. Happily for any shareholders, Francotyp-Postalia Holding actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Francotyp-Postalia Holding's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €2.60m. And it impressed us with free cash flow of €7.0m, being 119% of its EBIT. So we are not troubled with Francotyp-Postalia Holding's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Francotyp-Postalia Holding that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.