We Think Shop Apotheke Europe (ETR:SAE) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Shop Apotheke Europe N.V. (ETR:SAE) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Shop Apotheke Europe

What Is Shop Apotheke Europe's Debt?

As you can see below, at the end of September 2022, Shop Apotheke Europe had €274.7m of debt, up from €250.4m a year ago. Click the image for more detail. However, it does have €232.5m in cash offsetting this, leading to net debt of about €42.2m.

How Strong Is Shop Apotheke Europe's Balance Sheet?

According to the last reported balance sheet, Shop Apotheke Europe had liabilities of €127.1m due within 12 months, and liabilities of €280.7m due beyond 12 months. Offsetting this, it had €232.5m in cash and €56.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €118.5m.

Since publicly traded Shop Apotheke Europe shares are worth a total of €1.03b, 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 ultimately the future profitability of the business will decide if Shop Apotheke Europe can strengthen its balance sheet over time. 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 12%, to €1.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Shop Apotheke Europe had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €43m 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 €68m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that Shop Apotheke Europe is showing 1 warning sign in our investment analysis , 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.