Fielmann Group (ETR:FIE) Has A Pretty Healthy Balance Sheet

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. We note that Fielmann Group AG (ETR:FIE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Fielmann Group

How Much Debt Does Fielmann Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Fielmann Group had €1.72m of debt, an increase on €205.0k, over one year. However, it does have €169.6m in cash offsetting this, leading to net cash of €167.9m.

How Strong Is Fielmann Group's Balance Sheet?

We can see from the most recent balance sheet that Fielmann Group had liabilities of €417.3m falling due within a year, and liabilities of €486.6m due beyond that. Offsetting this, it had €169.6m in cash and €126.6m in receivables that were due within 12 months. So its liabilities total €607.7m more than the combination of its cash and short-term receivables.

Given Fielmann Group has a market capitalization of €3.55b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Fielmann Group boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Fielmann Group saw its EBIT decline by 3.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Fielmann Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Fielmann Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Fielmann Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Fielmann Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €167.9m. And it impressed us with free cash flow of €200m, being 119% of its EBIT. So we don't think Fielmann Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Fielmann Group you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.