Here's Why Shop Apotheke Europe (ETR:SAE) Can Afford Some Debt

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. As with many other companies Shop Apotheke Europe N.V. (ETR:SAE) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shop Apotheke Europe

How Much Debt Does Shop Apotheke Europe Carry?

The image below, which you can click on for greater detail, shows that at March 2023 Shop Apotheke Europe had debt of €257.3m, up from €238.2m in one year. However, it does have €216.0m in cash offsetting this, leading to net debt of about €41.2m.

How Healthy Is Shop Apotheke Europe's Balance Sheet?

The latest balance sheet data shows that Shop Apotheke Europe had liabilities of €156.4m due within a year, and liabilities of €256.3m falling due after that. Offsetting this, it had €216.0m in cash and €60.7m in receivables that were due within 12 months. So it has liabilities totalling €135.9m more than its cash and near-term receivables, combined.

Since publicly traded Shop Apotheke Europe shares are worth a total of €1.67b, 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. 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 Shop Apotheke Europe's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Shop Apotheke Europe wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to €1.3b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Shop Apotheke Europe produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €38m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €59m of cash over the last year. So to be blunt we think it is risky. 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 example, we've discovered 2 warning signs for Shop Apotheke Europe that you should be aware of before investing here.

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.