Is CTS Eventim KGaA (ETR:EVD) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that CTS Eventim AG & Co. KGaA (ETR:EVD) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 CTS Eventim KGaA

What Is CTS Eventim KGaA's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 CTS Eventim KGaA had €3.23m of debt, an increase on €354.0k, over one year. But it also has €1.67b in cash to offset that, meaning it has €1.67b net cash.

How Strong Is CTS Eventim KGaA's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CTS Eventim KGaA had liabilities of €1.95b due within 12 months and liabilities of €235.0m due beyond that. On the other hand, it had cash of €1.67b and €266.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €239.0m.

Of course, CTS Eventim KGaA has a market capitalization of €8.00b, so these liabilities are probably manageable. 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, CTS Eventim KGaA also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, CTS Eventim KGaA grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine CTS Eventim KGaA'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. CTS Eventim KGaA 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, CTS Eventim KGaA actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about CTS Eventim KGaA's liabilities, but we can be reassured by the fact it has has net cash of €1.67b. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in €459m. So we don't think CTS Eventim KGaA's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for CTS Eventim KGaA you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.