Friedrich Vorwerk Group (ETR:VH2) Is Carrying A Fair Bit Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Friedrich Vorwerk Group SE (ETR:VH2) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Friedrich Vorwerk Group

How Much Debt Does Friedrich Vorwerk Group Carry?

The image below, which you can click on for greater detail, shows that Friedrich Vorwerk Group had debt of €23.7m at the end of September 2023, a reduction from €31.1m over a year. On the flip side, it has €2.62m in cash leading to net debt of about €21.1m.

How Healthy Is Friedrich Vorwerk Group's Balance Sheet?

The latest balance sheet data shows that Friedrich Vorwerk Group had liabilities of €107.6m due within a year, and liabilities of €54.6m falling due after that. On the other hand, it had cash of €2.62m and €157.1m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Friedrich Vorwerk Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €320.4m company is short on cash, but still worth keeping an eye on the balance sheet. 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 Friedrich Vorwerk Group 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.

Over 12 months, Friedrich Vorwerk Group reported revenue of €386m, which is a gain of 17%, 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.

Caveat Emptor

Over the last twelve months Friedrich Vorwerk Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €9.4m. 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. Surprisingly, we note that it actually reported positive free cash flow of €9.8m and a profit of €2.0m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. For example, we've discovered 2 warning signs for Friedrich Vorwerk Group that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.