Does Wacker Chemie (ETR:WCH) Have A Healthy Balance Sheet?

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.' 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 Wacker Chemie AG (ETR:WCH) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Wacker Chemie

What Is Wacker Chemie's Net Debt?

As you can see below, Wacker Chemie had €1.29b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have €1.49b in cash offsetting this, leading to net cash of €199.1m.

How Healthy Is Wacker Chemie's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wacker Chemie had liabilities of €1.94b due within 12 months and liabilities of €2.30b due beyond that. Offsetting this, it had €1.49b in cash and €1.45b in receivables that were due within 12 months. So its liabilities total €1.30b more than the combination of its cash and short-term receivables.

Given Wacker Chemie has a market capitalization of €7.59b, 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. While it does have liabilities worth noting, Wacker Chemie also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Wacker Chemie grew its EBIT by 189% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Wacker Chemie 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, a company can only pay off debt with cold hard cash, not accounting profits. While Wacker Chemie 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, Wacker Chemie generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While Wacker Chemie does have more liabilities than liquid assets, it also has net cash of €199.1m. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in €708m. So we don't think Wacker Chemie's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Wacker Chemie (1 is a bit unpleasant!) that you should be aware of before investing here.

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.