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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Wacker Chemie

What Is Wacker Chemie's Net Debt?

The chart below, which you can click on for greater detail, shows that Wacker Chemie had €1.41b in debt in June 2021; about the same as the year before. But on the other hand it also has €1.61b in cash, leading to a €207.7m net cash position.

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 €1.36b due within 12 months and liabilities of €3.67b due beyond that. On the other hand, it had cash of €1.61b and €980.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.43b.

While this might seem like a lot, it is not so bad since Wacker Chemie has a market capitalization of €7.20b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 809% last year, which is an impressive improvement. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, Wacker Chemie actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Wacker Chemie does have more liabilities than liquid assets, it also has net cash of €207.7m. The cherry on top was that in converted 158% of that EBIT to free cash flow, bringing in €872m. So is Wacker Chemie's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Wacker Chemie is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.