Is Splendid Medien (ETR:SPM) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Splendid Medien AG (ETR:SPM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Splendid Medien

How Much Debt Does Splendid Medien Carry?

The image below, which you can click on for greater detail, shows that Splendid Medien had debt of €2.05m at the end of June 2022, a reduction from €4.88m over a year. But it also has €6.45m in cash to offset that, meaning it has €4.40m net cash.

A Look At Splendid Medien's Liabilities

The latest balance sheet data shows that Splendid Medien had liabilities of €21.9m due within a year, and liabilities of €341.0k falling due after that. Offsetting this, it had €6.45m in cash and €9.03m in receivables that were due within 12 months. So its liabilities total €6.72m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Splendid Medien has a market capitalization of €15.9m, 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. Despite its noteworthy liabilities, Splendid Medien boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Splendid Medien's load is not too heavy, because its EBIT was down 58% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Splendid Medien'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. While Splendid Medien 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, Splendid Medien 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

While Splendid Medien does have more liabilities than liquid assets, it also has net cash of €4.40m. And it impressed us with free cash flow of €3.8m, being 255% of its EBIT. So we are not troubled with Splendid Medien's debt use. There's no doubt that we learn most about debt from the balance sheet. 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 2 warning signs for Splendid Medien you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.