We Think Wacker Chemie (ETR:WCH) Can Manage Its Debt With Ease
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 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. We note that Wacker Chemie AG (ETR:WCH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Wacker Chemie
What Is Wacker Chemie's Net Debt?
As you can see below, Wacker Chemie had €1.28b of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have €1.61b in cash offsetting this, leading to net cash of €331.8m.
A Look At Wacker Chemie's Liabilities
The latest balance sheet data shows that Wacker Chemie had liabilities of €1.36b due within a year, and liabilities of €3.67b falling due after that. On the other hand, it had cash of €1.61b and €980.8m worth of receivables due within a year. So it has liabilities totalling €2.43b more than its cash and near-term receivables, combined.
Wacker Chemie has a market capitalization of €7.28b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.
Better yet, Wacker Chemie grew its EBIT by 1,297% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wacker Chemie'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Wacker Chemie 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. Over the last three years, Wacker Chemie actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
Although Wacker Chemie's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €331.8m. The cherry on top was that in converted 197% of that EBIT to free cash flow, bringing in €872m. So we don't think Wacker Chemie's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Wacker Chemie (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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Access Free AnalysisThis 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.
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