Is Kulmbacher Brauerei Aktien-Gesellschaft (MUN:KUL) Using Too Much Debt?

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 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 Kulmbacher Brauerei Aktien-Gesellschaft (MUN:KUL) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Kulmbacher Brauerei Aktien-Gesellschaft

How Much Debt Does Kulmbacher Brauerei Aktien-Gesellschaft Carry?

As you can see below, at the end of December 2021, Kulmbacher Brauerei Aktien-Gesellschaft had €17.4m of debt, up from €9.88m a year ago. Click the image for more detail. But on the other hand it also has €38.3m in cash, leading to a €21.0m net cash position.

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

According to the last reported balance sheet, Kulmbacher Brauerei Aktien-Gesellschaft had liabilities of €86.1m due within 12 months, and liabilities of €74.0m due beyond 12 months. Offsetting this, it had €38.3m in cash and €21.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €100.1m.

Kulmbacher Brauerei Aktien-Gesellschaft has a market capitalization of €383.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 7.6% 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kulmbacher Brauerei Aktien-Gesellschaft 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 three years, Kulmbacher Brauerei Aktien-Gesellschaft 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

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 €21.0m. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in €5.0m. So we are not troubled with Kulmbacher Brauerei Aktien-Gesellschaft's debt use. 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. We've identified 2 warning signs with Kulmbacher Brauerei Aktien-Gesellschaft (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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

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.