Is pferdewetten.de (ETR:EMH) Using Debt In A Risky Way?

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. As with many other companies pferdewetten.de AG (ETR:EMH) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for pferdewetten.de

What Is pferdewetten.de's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 pferdewetten.de had €8.00m of debt, an increase on none, over one year. However, its balance sheet shows it holds €10.4m in cash, so it actually has €2.42m net cash.

How Strong Is pferdewetten.de's Balance Sheet?

According to the last reported balance sheet, pferdewetten.de had liabilities of €20.2m due within 12 months, and liabilities of €8.87m due beyond 12 months. Offsetting these obligations, it had cash of €10.4m as well as receivables valued at €3.29m due within 12 months. So it has liabilities totalling €15.4m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since pferdewetten.de has a market capitalization of €56.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, pferdewetten.de also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine pferdewetten.de'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.

In the last year pferdewetten.de wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to €18m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is pferdewetten.de?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year pferdewetten.de had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €4.3m and booked a €4.8m accounting loss. Given it only has net cash of €2.42m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, pferdewetten.de may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for pferdewetten.de 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.