Kulmbacher Brauerei Aktien-Gesellschaft (MUN:KUL) Seems To Use Debt Quite Sensibly

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. As with many other companies Kulmbacher Brauerei Aktien-Gesellschaft (MUN:KUL) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Kulmbacher Brauerei Aktien-Gesellschaft

How Much Debt Does Kulmbacher Brauerei Aktien-Gesellschaft Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Kulmbacher Brauerei Aktien-Gesellschaft had debt of €18.9m, up from €4.44m in one year. However, its balance sheet shows it holds €19.9m in cash, so it actually has €1.01m net cash.

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

According to the last reported balance sheet, Kulmbacher Brauerei Aktien-Gesellschaft had liabilities of €86.6m due within 12 months, and liabilities of €72.1m due beyond 12 months. Offsetting these obligations, it had cash of €19.9m as well as receivables valued at €39.6m due within 12 months. So it has liabilities totalling €99.2m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Kulmbacher Brauerei Aktien-Gesellschaft is worth €268.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Kulmbacher Brauerei Aktien-Gesellschaft also has more cash than debt, so we're pretty confident it can manage its debt safely.

While Kulmbacher Brauerei Aktien-Gesellschaft doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, Kulmbacher Brauerei Aktien-Gesellschaft actually produced more free cash flow than EBIT over the last three years. 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 Kulmbacher Brauerei Aktien-Gesellschaft does have more liabilities than liquid assets, it also has net cash of €1.01m. And it impressed us with free cash flow of €13m, being 145% of its EBIT. So we don't have any problem with Kulmbacher Brauerei Aktien-Gesellschaft's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Kulmbacher Brauerei Aktien-Gesellschaft you should be aware of, and 1 of them is a bit unpleasant.

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.

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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.