Here's Why SM Wirtschaftsberatungs (ETR:SMWN) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that SM Wirtschaftsberatungs AG (ETR:SMWN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SM Wirtschaftsberatungs

How Much Debt Does SM Wirtschaftsberatungs Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 SM Wirtschaftsberatungs had €2.42m of debt, an increase on €2.19m, over one year. On the flip side, it has €311.6k in cash leading to net debt of about €2.11m.

How Strong Is SM Wirtschaftsberatungs' Balance Sheet?

According to the last reported balance sheet, SM Wirtschaftsberatungs had liabilities of €719.4k due within 12 months, and liabilities of €1.93m due beyond 12 months. Offsetting these obligations, it had cash of €311.6k as well as receivables valued at €1.73m due within 12 months. So it has liabilities totalling €605.3k more than its cash and near-term receivables, combined.

Given SM Wirtschaftsberatungs has a market capitalization of €26.1m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is SM Wirtschaftsberatungs's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

It seems likely shareholders hope that SM Wirtschaftsberatungs can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Not only did SM Wirtschaftsberatungs's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €628k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of €61k. So we do think this stock is quite risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for SM Wirtschaftsberatungs (of which 2 make us uncomfortable!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.