EnviTec Biogas (ETR:ETG) Has A Rock Solid Balance Sheet

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. We note that EnviTec Biogas AG (ETR:ETG) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for EnviTec Biogas

What Is EnviTec Biogas's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 EnviTec Biogas had €76.1m of debt, an increase on €59.2m, over one year. But on the other hand it also has €85.3m in cash, leading to a €9.16m net cash position.

How Strong Is EnviTec Biogas' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that EnviTec Biogas had liabilities of €113.2m due within 12 months and liabilities of €103.5m due beyond that. Offsetting these obligations, it had cash of €85.3m as well as receivables valued at €39.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €91.7m.

Since publicly traded EnviTec Biogas shares are worth a total of €490.1m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, EnviTec Biogas boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that EnviTec Biogas has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since EnviTec Biogas will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While EnviTec Biogas has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, EnviTec Biogas produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While EnviTec Biogas does have more liabilities than liquid assets, it also has net cash of €9.16m. And it impressed us with its EBIT growth of 35% over the last year. So is EnviTec Biogas's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with EnviTec Biogas .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.