Is LUDWIG BECK am Rathauseck - Textilhaus Feldmeier (ETR:ECK) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, LUDWIG BECK am Rathauseck - Textilhaus Feldmeier AG (ETR:ECK) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for LUDWIG BECK am Rathauseck - Textilhaus Feldmeier

What Is LUDWIG BECK am Rathauseck - Textilhaus Feldmeier's Debt?

The image below, which you can click on for greater detail, shows that LUDWIG BECK am Rathauseck - Textilhaus Feldmeier had debt of €63.2m at the end of September 2024, a reduction from €106.2m over a year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is LUDWIG BECK am Rathauseck - Textilhaus Feldmeier's Balance Sheet?

We can see from the most recent balance sheet that LUDWIG BECK am Rathauseck - Textilhaus Feldmeier had liabilities of €42.7m falling due within a year, and liabilities of €63.2m due beyond that. Offsetting these obligations, it had cash of €400.0k as well as receivables valued at €2.80m due within 12 months. So its liabilities total €102.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €52.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, LUDWIG BECK am Rathauseck - Textilhaus Feldmeier would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Weak interest cover of 1.1 times and a disturbingly high net debt to EBITDA ratio of 6.6 hit our confidence in LUDWIG BECK am Rathauseck - Textilhaus Feldmeier like a one-two punch to the gut. The debt burden here is substantial. Notably, LUDWIG BECK am Rathauseck - Textilhaus Feldmeier's EBIT was pretty flat over the last year, which isn't ideal given the debt load. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since LUDWIG BECK am Rathauseck - Textilhaus Feldmeier will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last two years, LUDWIG BECK am Rathauseck - Textilhaus Feldmeier actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

To be frank both LUDWIG BECK am Rathauseck - Textilhaus Feldmeier's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. We're quite clear that we consider LUDWIG BECK am Rathauseck - Textilhaus Feldmeier to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. Case in point: We've spotted 3 warning signs for LUDWIG BECK am Rathauseck - Textilhaus Feldmeier you should be aware of, and 1 of them shouldn't be ignored.

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.