Beiersdorf (ETR:BEI) 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Beiersdorf Aktiengesellschaft (ETR:BEI) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Beiersdorf

What Is Beiersdorf's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Beiersdorf had debt of €318.0m, up from none in one year. However, it does have €1.58b in cash offsetting this, leading to net cash of €1.26b.

How Healthy Is Beiersdorf's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beiersdorf had liabilities of €2.62b due within 12 months and liabilities of €1.08b due beyond that. On the other hand, it had cash of €1.58b and €1.57b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €559.0m.

Of course, Beiersdorf has a titanic market capitalization of €20.8b, so these liabilities are probably manageable. 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, Beiersdorf also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that Beiersdorf saw its EBIT decline by 5.9% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Beiersdorf can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Beiersdorf 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. During the last three years, Beiersdorf produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

We could understand if investors are concerned about Beiersdorf's liabilities, but we can be reassured by the fact it has has net cash of €1.26b. So we don't have any problem with Beiersdorf's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Beiersdorf, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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