We Think LUDWIG BECK am Rathauseck - Textilhaus Feldmeier (ETR:ECK) Is Taking Some Risk With Its Debt

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.' 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. As with many other companies LUDWIG BECK am Rathauseck - Textilhaus Feldmeier AG (ETR:ECK) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. 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

How Much Debt Does LUDWIG BECK am Rathauseck - Textilhaus Feldmeier Carry?

As you can see below, at the end of December 2021, LUDWIG BECK am Rathauseck - Textilhaus Feldmeier had €95.9m of debt, up from €49.0m a year ago. Click the image for more detail. 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 €18.3m falling due within a year, and liabilities of €87.0m due beyond that. Offsetting these obligations, it had cash of €333.0k as well as receivables valued at €5.97m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €99.0m.

This deficit is considerable relative to its market capitalization of €107.9m, so it does suggest shareholders should keep an eye on LUDWIG BECK am Rathauseck - Textilhaus Feldmeier's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

LUDWIG BECK am Rathauseck - Textilhaus Feldmeier has a rather high debt to EBITDA ratio of 7.4 which suggests a meaningful debt load. However, its interest coverage of 2.9 is reasonably strong, which is a good sign. However, the silver lining was that LUDWIG BECK am Rathauseck - Textilhaus Feldmeier achieved a positive EBIT of €6.6m in the last twelve months, an improvement on the prior year's loss. The balance sheet is clearly the area to focus on when you are analysing debt. But it is LUDWIG BECK am Rathauseck - Textilhaus Feldmeier'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. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, LUDWIG BECK am Rathauseck - Textilhaus Feldmeier actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

LUDWIG BECK am Rathauseck - Textilhaus Feldmeier's net debt to EBITDA and interest cover definitely weigh on it, in our esteem. But its conversion of EBIT to free cash flow tells a very different story, and suggests some resilience. Taking the abovementioned factors together we do think LUDWIG BECK am Rathauseck - Textilhaus Feldmeier's debt poses some risks to the business. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. 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. Be aware that LUDWIG BECK am Rathauseck - Textilhaus Feldmeier is showing 2 warning signs in our investment analysis , 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.