Is Kulmbacher Brauerei Aktien-Gesellschaft (MUN:KUL) A Risky Investment?

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.' 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. Importantly, Kulmbacher Brauerei Aktien-Gesellschaft (MUN:KUL) does carry debt. But is this debt a concern to shareholders?

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. 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 Kulmbacher Brauerei Aktien-Gesellschaft

How Much Debt Does Kulmbacher Brauerei Aktien-Gesellschaft Carry?

As you can see below, at the end of June 2021, Kulmbacher Brauerei Aktien-Gesellschaft had €4.44m of debt, up from none a year ago. Click the image for more detail. But it also has €22.8m in cash to offset that, meaning it has €18.4m net cash.

How Strong Is Kulmbacher Brauerei Aktien-Gesellschaft's Balance Sheet?

We can see from the most recent balance sheet that Kulmbacher Brauerei Aktien-Gesellschaft had liabilities of €82.5m falling due within a year, and liabilities of €73.7m due beyond that. On the other hand, it had cash of €22.8m and €45.1m worth of receivables due within a year. So its liabilities total €88.3m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Kulmbacher Brauerei Aktien-Gesellschaft is worth €275.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Kulmbacher Brauerei Aktien-Gesellschaft boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Kulmbacher Brauerei Aktien-Gesellschaft saw its EBIT decline by 4.6% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kulmbacher Brauerei Aktien-Gesellschaft will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Kulmbacher Brauerei Aktien-Gesellschaft 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. Over the last three years, Kulmbacher Brauerei Aktien-Gesellschaft actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Kulmbacher Brauerei Aktien-Gesellschaft's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €18.4m. The cherry on top was that in converted 137% of that EBIT to free cash flow, bringing in €17m. So we don't have any problem with Kulmbacher Brauerei Aktien-Gesellschaft's use of debt. 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 instance, we've identified 3 warning signs for Kulmbacher Brauerei Aktien-Gesellschaft (1 is potentially serious) you should be aware of.

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.

If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.