We Think Eckert & Ziegler Strahlen- und Medizintechnik (ETR:EUZ) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Eckert & Ziegler Strahlen- und Medizintechnik AG (ETR:EUZ) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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 the opportunities and risks within the DE Medical Equipment industry.

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

As you can see below, at the end of June 2022, Eckert & Ziegler Strahlen- und Medizintechnik had €15.6m of debt, up from none a year ago. Click the image for more detail. However, it does have €77.2m in cash offsetting this, leading to net cash of €61.7m.

How Healthy Is Eckert & Ziegler Strahlen- und Medizintechnik's Balance Sheet?

The latest balance sheet data shows that Eckert & Ziegler Strahlen- und Medizintechnik had liabilities of €58.3m due within a year, and liabilities of €116.9m falling due after that. On the other hand, it had cash of €77.2m and €44.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €53.1m.

Since publicly traded Eckert & Ziegler Strahlen- und Medizintechnik shares are worth a total of €849.2m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Eckert & Ziegler Strahlen- und Medizintechnik also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Eckert & Ziegler Strahlen- und Medizintechnik if management cannot prevent a repeat of the 38% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Eckert & Ziegler Strahlen- und Medizintechnik 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. Looking at the most recent three years, Eckert & Ziegler Strahlen- und Medizintechnik recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 €61.7m in net cash. So we are not troubled with Eckert & Ziegler Strahlen- und Medizintechnik'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. To that end, you should be aware of the 1 warning sign we've spotted with Eckert & Ziegler Strahlen- und Medizintechnik .

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.