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

January 24, 2020
  •  Updated
November 29, 2022
XTRA:FIE
Source: Shutterstock

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 Aktiengesellschaft (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?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Fielmann

What Is Fielmann's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2019 Fielmann had debt of €1.57m, up from €0.7 in one year. However, its balance sheet shows it holds €245.7m in cash, so it actually has €244.2m net cash.

XTRA:FIE Historical Debt, January 25th 2020
XTRA:FIE Historical Debt, January 25th 2020

How Healthy Is Fielmann's Balance Sheet?

According to the last reported balance sheet, Fielmann had liabilities of €319.7m due within 12 months, and liabilities of €349.5m due beyond 12 months. Offsetting this, it had €245.7m in cash and €100.3m in receivables that were due within 12 months. So it has liabilities totalling €323.2m more than its cash and near-term receivables, combined.

Given Fielmann has a market capitalization of €6.11b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Fielmann also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Fielmann grew its EBIT at 13% over the last year, further increasing its ability to manage debt. 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's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Fielmann 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. During the last three years, Fielmann produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Fielmann's liabilities, but we can be reassured by the fact it has has net cash of €244.2m. On top of that, it increased its EBIT by 13% in the last twelve months. So is Fielmann's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Fielmann that 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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