Is Eckert & Ziegler Strahlen- und Medizintechnik (ETR:EUZ) A Risky Investment?

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. Importantly, Eckert & Ziegler Strahlen- und Medizintechnik AG (ETR:EUZ) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for Eckert & Ziegler Strahlen- und Medizintechnik

What Is Eckert & Ziegler Strahlen- und Medizintechnik's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Eckert & Ziegler Strahlen- und Medizintechnik had €7.22m of debt, an increase on €5.0k, over one year. However, its balance sheet shows it holds €84.8m in cash, so it actually has €77.6m net cash.

A Look At Eckert & Ziegler Strahlen- und Medizintechnik's Liabilities

According to the last reported balance sheet, Eckert & Ziegler Strahlen- und Medizintechnik had liabilities of €56.1m due within 12 months, and liabilities of €103.6m due beyond 12 months. On the other hand, it had cash of €84.8m and €40.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €34.9m.

Given Eckert & Ziegler Strahlen- und Medizintechnik has a market capitalization of €808.5m, 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 Strahlen- und Medizintechnik boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Eckert & Ziegler Strahlen- und Medizintechnik's saving grace is its low debt levels, because its EBIT has tanked 48% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Eckert & Ziegler Strahlen- und Medizintechnik can strengthen its balance sheet over time. 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. While Eckert & Ziegler Strahlen- und Medizintechnik 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 most recent three years, Eckert & Ziegler Strahlen- und Medizintechnik recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Eckert & Ziegler Strahlen- und Medizintechnik has €77.6m in net cash. So we are not troubled with Eckert & Ziegler Strahlen- und Medizintechnik's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Eckert & Ziegler Strahlen- und Medizintechnik has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.

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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.