These 4 Measures Indicate That WCM Beteiligungs- und Grundbesitz-AG (ETR:WCMK) Is Using Debt Reasonably Well

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.' 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. As with many other companies WCM Beteiligungs- und Grundbesitz-AG (ETR:WCMK) makes use of debt. 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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 WCM Beteiligungs- und Grundbesitz-AG

What Is WCM Beteiligungs- und Grundbesitz-AG's Net Debt?

As you can see below, at the end of December 2023, WCM Beteiligungs- und Grundbesitz-AG had €33.6m of debt, up from €21.5m a year ago. Click the image for more detail. But it also has €120.4m in cash to offset that, meaning it has €86.9m net cash.

How Healthy Is WCM Beteiligungs- und Grundbesitz-AG's Balance Sheet?

According to the last reported balance sheet, WCM Beteiligungs- und Grundbesitz-AG had liabilities of €9.09m due within 12 months, and liabilities of €45.2m due beyond 12 months. On the other hand, it had cash of €120.4m and €10.8m worth of receivables due within a year. So it actually has €76.9m more liquid assets than total liabilities.

It's good to see that WCM Beteiligungs- und Grundbesitz-AG has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that WCM Beteiligungs- und Grundbesitz-AG has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that WCM Beteiligungs- und Grundbesitz-AG's load is not too heavy, because its EBIT was down 56% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is WCM Beteiligungs- und Grundbesitz-AG's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While WCM Beteiligungs- und Grundbesitz-AG 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. In the last three years, WCM Beteiligungs- und Grundbesitz-AG created free cash flow amounting to 10% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case WCM Beteiligungs- und Grundbesitz-AG has €86.9m in net cash and a decent-looking balance sheet. So we don't have any problem with WCM Beteiligungs- und Grundbesitz-AG's use of debt. 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. We've identified 2 warning signs with WCM Beteiligungs- und Grundbesitz-AG , and understanding them should be part of your investment process.

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.

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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.