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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Shop Apotheke Europe N.V. (ETR:SAE) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shop Apotheke Europe

How Much Debt Does Shop Apotheke Europe Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Shop Apotheke Europe had €268.3m of debt, an increase on €250.3m, over one year. However, it also had €263.7m in cash, and so its net debt is €4.60m.

A Look At Shop Apotheke Europe's Liabilities

We can see from the most recent balance sheet that Shop Apotheke Europe had liabilities of €135.4m falling due within a year, and liabilities of €275.5m due beyond that. Offsetting these obligations, it had cash of €263.7m as well as receivables valued at €55.5m due within 12 months. So its liabilities total €91.7m more than the combination of its cash and short-term receivables.

Of course, Shop Apotheke Europe has a market capitalization of €734.7m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Shop Apotheke Europe has a very light debt load indeed. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Shop Apotheke Europe reported revenue of €1.1b, which is a gain of 7.7%, although it did not report any earnings before interest and tax. 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. To be specific the EBIT loss came in at €54m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €48m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Shop Apotheke Europe , and understanding them should be part of your investment process.

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.

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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.