Is Bastei Lübbe (ETR:BST) Using Too Much Debt?

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. As with many other companies Bastei Lübbe AG (ETR:BST) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Bastei Lübbe

How Much Debt Does Bastei Lübbe Carry?

You can click the graphic below for the historical numbers, but it shows that Bastei Lübbe had €3.08m of debt in December 2020, down from €9.47m, one year before. But on the other hand it also has €11.0m in cash, leading to a €7.94m net cash position.

How Strong Is Bastei Lübbe's Balance Sheet?

We can see from the most recent balance sheet that Bastei Lübbe had liabilities of €36.4m falling due within a year, and liabilities of €6.49m due beyond that. On the other hand, it had cash of €11.0m and €22.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €9.55m.

Since publicly traded Bastei Lübbe shares are worth a total of €66.4m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Bastei Lübbe also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Bastei Lübbe grew its EBIT by 73% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Bastei Lübbe'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 company can only pay off debt with cold hard cash, not accounting profits. While Bastei Lübbe 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. Over the last three years, Bastei Lübbe actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although Bastei Lübbe's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €7.94m. And it impressed us with free cash flow of €9.1m, being 181% of its EBIT. So we don't think Bastei Lübbe'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. To that end, you should be aware of the 1 warning sign we've spotted with Bastei Lübbe .

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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This article by Simply Wall St is general in nature. 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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