Is Shop Apotheke Europe (ETR:SAE) Using Too Much Debt?

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.' 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 real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shop Apotheke Europe

What Is Shop Apotheke Europe's Debt?

As you can see below, at the end of September 2021, Shop Apotheke Europe had €250.4m of debt, up from €170.2m a year ago. Click the image for more detail. But it also has €315.2m in cash to offset that, meaning it has €64.8m net cash.

A Look At Shop Apotheke Europe's Liabilities

Zooming in on the latest balance sheet data, we can see that Shop Apotheke Europe had liabilities of €100.0m due within 12 months and liabilities of €257.0m due beyond that. Offsetting this, it had €315.2m in cash and €42.4m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Shop Apotheke Europe's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €1.58b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Shop Apotheke Europe has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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 16%, to €1.0b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Shop Apotheke Europe?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Shop Apotheke Europe had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €14m of cash and made a loss of €39m. While this does make the company a bit risky, it's important to remember it has net cash of €64.8m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Shop Apotheke Europe you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.