Here's Why Eckert & Ziegler (ETR:EUZ) Can Manage Its Debt Responsibly

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 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. Importantly, Eckert & Ziegler SE (ETR:EUZ) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Eckert & Ziegler

What Is Eckert & Ziegler's Net Debt?

As you can see below, at the end of December 2023, Eckert & Ziegler had €26.4m of debt, up from €22.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds €68.0m in cash, so it actually has €41.6m net cash.

How Strong Is Eckert & Ziegler's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eckert & Ziegler had liabilities of €83.7m due within 12 months and liabilities of €131.6m due beyond that. Offsetting these obligations, it had cash of €68.0m as well as receivables valued at €54.4m due within 12 months. So its liabilities total €92.8m more than the combination of its cash and short-term receivables.

Given Eckert & Ziegler has a market capitalization of €739.3m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Eckert & Ziegler boasts net cash, so it's fair to say it does not have a heavy debt load!

Eckert & Ziegler's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Eckert & Ziegler's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Eckert & Ziegler 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. In the last three years, Eckert & Ziegler created free cash flow amounting to 19% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

Although Eckert & Ziegler's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €41.6m. So we are not troubled with Eckert & Ziegler's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Eckert & Ziegler, you may well want to click here to check an interactive graph of its earnings per share history.

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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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.