We Think LUDWIG BECK am Rathauseck - Textilhaus Feldmeier (ETR:ECK) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, LUDWIG BECK am Rathauseck - Textilhaus Feldmeier AG (ETR:ECK) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for LUDWIG BECK am Rathauseck - Textilhaus Feldmeier

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

As you can see below, LUDWIG BECK am Rathauseck - Textilhaus Feldmeier had €36.6m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. Net debt is about the same, since the it doesn't have much cash.

A Look At LUDWIG BECK am Rathauseck - Textilhaus Feldmeier's Liabilities

Zooming in on the latest balance sheet data, we can see that LUDWIG BECK am Rathauseck - Textilhaus Feldmeier had liabilities of €26.0m due within 12 months and liabilities of €79.4m due beyond that. On the other hand, it had cash of €300.0k and €5.80m worth of receivables due within a year. So it has liabilities totalling €99.3m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €84.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive 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.

While LUDWIG BECK am Rathauseck - Textilhaus Feldmeier's debt to EBITDA ratio (4.0) suggests that it uses some debt, its interest cover is very weak, at 2.2, suggesting high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. Looking on the bright side, LUDWIG BECK am Rathauseck - Textilhaus Feldmeier boosted its EBIT by a silky 41% in the last year. Like the milk of human kindness that sort of growth increases resilience, making the company more capable of managing debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since LUDWIG BECK am Rathauseck - Textilhaus Feldmeier will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into 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

Both LUDWIG BECK am Rathauseck - Textilhaus Feldmeier's ability to to convert EBIT to free cash flow and its EBIT growth rate gave us comfort that it can handle its debt. But truth be told its interest cover had us nibbling our nails. Looking at all this data makes us feel a little cautious about LUDWIG BECK am Rathauseck - Textilhaus Feldmeier's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. Be aware that LUDWIG BECK am Rathauseck - Textilhaus Feldmeier is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.

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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.