Is Shop Apotheke Europe (ETR:SAE) Weighed On By Its Debt Load?

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. Importantly, Shop Apotheke Europe N.V. (ETR:SAE) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shop Apotheke Europe

How Much Debt Does Shop Apotheke Europe Carry?

As you can see below, Shop Apotheke Europe had €238.2m of debt at March 2022, down from €255.7m a year prior. But it also has €295.6m in cash to offset that, meaning it has €57.5m 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 €132.4m due within 12 months and liabilities of €245.4m due beyond that. Offsetting this, it had €295.6m in cash and €53.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €28.3m.

Having regard to Shop Apotheke Europe's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €1.66b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Shop Apotheke Europe boasts net cash, so it's fair to say it does not have a heavy debt load! 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'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 6.0%, 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.

So How Risky Is Shop Apotheke Europe?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Shop Apotheke Europe had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of €40m and booked a €91m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of €57.5m. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Shop Apotheke Europe that you should be aware of.

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.