Stock Analysis

We Think Wacker Chemie (ETR:WCH) Can Manage Its Debt With Ease

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XTRA:WCH
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Wacker Chemie AG (ETR:WCH) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out the opportunities and risks within the DE Chemicals industry.

How Much Debt Does Wacker Chemie Carry?

As you can see below, at the end of September 2022, Wacker Chemie had €1.58b of debt, up from €1.41b a year ago. Click the image for more detail. However, it does have €1.79b in cash offsetting this, leading to net cash of €212.5m.

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XTRA:WCH Debt to Equity History December 9th 2022

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 €2.08b due within 12 months and liabilities of €2.42b due beyond that. Offsetting this, it had €1.79b in cash and €1.43b in receivables that were due within 12 months. So it has liabilities totalling €1.28b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Wacker Chemie is worth €5.89b, and thus could probably raise enough capital to shore up 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.

Even more impressive was the fact that Wacker Chemie grew its EBIT by 100% 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 produced sturdy free cash flow equating to 76% 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

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 €212.5m. And we liked the look of last year's 100% year-on-year EBIT growth. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Wacker Chemie (1 is significant) you should be aware of.

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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Find out whether Wacker Chemie is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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