Friedrich Vorwerk Group (ETR:VH2) Could Easily Take On More 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Friedrich Vorwerk Group SE (ETR:VH2) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Friedrich Vorwerk Group

What Is Friedrich Vorwerk Group's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Friedrich Vorwerk Group had debt of €29.0m, up from €23.7m in one year. However, its balance sheet shows it holds €52.0m in cash, so it actually has €23.0m net cash.

A Look At Friedrich Vorwerk Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Friedrich Vorwerk Group had liabilities of €121.1m due within 12 months and liabilities of €59.5m due beyond that. Offsetting these obligations, it had cash of €52.0m as well as receivables valued at €148.2m due within 12 months. So it can boast €19.7m more liquid assets than total liabilities.

This surplus suggests that Friedrich Vorwerk Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Friedrich Vorwerk Group has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Friedrich Vorwerk Group turned things around in the last 12 months, delivering and EBIT of €29m. 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 Friedrich Vorwerk Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Friedrich Vorwerk Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Friedrich Vorwerk Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Friedrich Vorwerk Group has €23.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €50m, being 173% of its EBIT. So is Friedrich Vorwerk Group's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Friedrich Vorwerk Group, you may well want to click here to check an interactive graph of its earnings per share history.

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.