The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Schwälbchen Molkerei Jakob Berz AG (FRA:SMB) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
How Much Debt Does Schwälbchen Molkerei Jakob Berz Carry?
The image below, which you can click on for greater detail, shows that Schwälbchen Molkerei Jakob Berz had debt of €4.98m at the end of December 2020, a reduction from €6.81m over a year. But it also has €14.7m in cash to offset that, meaning it has €9.67m net cash.
How Strong Is Schwälbchen Molkerei Jakob Berz's Balance Sheet?
The latest balance sheet data shows that Schwälbchen Molkerei Jakob Berz had liabilities of €19.1m due within a year, and liabilities of €12.0m falling due after that. Offsetting these obligations, it had cash of €14.7m as well as receivables valued at €15.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €871.1k.
Having regard to Schwälbchen Molkerei Jakob Berz's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €57.5m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Schwälbchen Molkerei Jakob Berz boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Schwälbchen Molkerei Jakob Berz's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Schwälbchen Molkerei Jakob Berz had a loss before interest and tax, and actually shrunk its revenue by 16%, to €154m. That's not what we would hope to see.
So How Risky Is Schwälbchen Molkerei Jakob Berz?
While Schwälbchen Molkerei Jakob Berz lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €4.5m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Schwälbchen Molkerei Jakob Berz (1 shouldn't be ignored!) that you should be aware of before investing here.
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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